O'Reilly Automotive Inc (ORLY) 2008 Q4 法說會逐字稿

Good morning, my name is Don and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter earnings release conference call. (Operator Instructions)

Thank you, Mr. Tom McFall, you may begin your conference.

Thank you, Don. Good morning, everyone and welcome to the O'Reilly fourth quarter 2008 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 this press release that are not historical facts are forward-looking statements. Such a statement discusses among other things, expected growth, store development and expansion strategies, business strategies, and 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 31st, 2007, for more details.

At this time I'd like to introduce Greg Henslee.

Thank, Tom, good morning everyone and welcome to our fourth quarter 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 and David O'Reilly, our Executive Chairman is also present.

I'd like to start off by once again thanking our management team and all O'Reilly team members for their continued focus on providing the highest levels of customer service in each of our stores that led to our strong fourth quarter results. The core O'Reilly stores performed exceptionally well throughout the quarter finishing with comparable store sales of 6.2% which is just outstanding especially considering the strong performance we saw in some of our more mature regions.

I'd also like to thank our newest team members who joined team O'Reilly as part of our CSK acquisition. Several of you have seen your store completely transformed into an O'Reilly store with all new merchandise and inventory coverage, five-night a week inventory replenishment, multiple drops a day from your servicing distribution center and more competitive pricing as well as a whole new set of tools with which to pursue the commercial business. I want to thank all of our new team members for the commitment you're making to the success of our Company. We're very much looking forward to the acceleration of this transition and are very proud that you're members of team O'Reilly and of our performance to this point.

At a more macro level it's clear to me that the lower fuel costs as well as the decrease in new car sales as a result of many consumers making the decision to keep and drive a car that may have been a trade-in candidate in better economic times has resulted in many of our customers deciding to perform some much needed maintenance on their cars to ensure they maximize the life of the vehicle and keep it in good driving condition. Many of our commercial customers have commented on the change they've seen over the past several months as our customers transitioned from doing just what it takes to keep the car on the road to a mentality of maintaining their cars correctly in order to extend its life.

Obviously the headwind is simply the rising rate of unemployment along with other recessionary factors that affect the amount of money our customers are able to spend to maintain their cars. However, we strongly believe that automobile maintenance ranks very high on most families' priority list and that the vast majority of our sales are not discretionary. And, for that reason, along with the average age of vehicles continuing to increase, feel our business will do much better than most retailers in this recessionary environment.

Generally I think the core O'Reilly comparable store sales results speak for themselves and my primary comment with regard to our core locations is that business remain steady coming out of the third quarter and throughout the fourth quarter and that solid trend has continued to this point in the first quarter.

At our CSK locations I want to try and provide as much detail as is reasonable about the progress we are making with the transition and the level of performance we're seeing in the conversion stores. As we've talked about before in the initial phase of the conversion process, our plan is to completely lift the inventory, reset the store layouts, install our systems, signage and decor and replace the inventory with an inventory that ideally fits each store's individual market as is the case at all O'Reilly stores. At the point of conversion the inventory of these stores would start being replenished by an O'Reilly distribution center and would be replenished five nights a week and receive the same high level of service as all of the existing O'Reilly stores.

We'll do this on about 185 stores here in the central US at a rate of about eight per week. At year-end we had completed 52 of these full conversions and as of the end of last week had completed 96 of them. All 185 store conversions will be completed by May of this year.

Typically the comparable store sales trend each of these stores was on at the point of conversion incrementally improves following the conversion and most start showing positive comparable store sales growth by their third or fourth week, as our team members adjust to the new point of sales system, product lineup and inventory availability. We converted our first set of stores approximately 16 weeks ago.

We converted four stores that week and in their sixteenth week after the conversion those stores comped at a rate of 14.9%. Our stores that have been converted at least 15 weeks, which represents 11 stores, comped at 17.3% in their fifteenth week.

The stores that have been converted at least 14 weeks, represent 19 stores and they comped at 16.4% in their fourteenth week. And the stores that have been converted at least 13 weeks which represents 27 of the converted stores comped at 12.2% in their thirteenth week. I hope this clearly represents the meaningful traction that converted stores gain as they accelerate market penetration following these conversions.

Obviously these sales improvements take a little time to build but our experience has been that the converted stores emerge from the negative comparable store sales trend they have been on, three to four weeks following the conversion and gain momentum in the weeks that follow as the team members adjust and the customers become aware of our more robust hard part offering. We're very excited about the potential of these stores as they become more established as professional parts-store locations.

The remaining CSK stores are being changed over one product line at a time throughout the remainder of this year and will be converted to our systems as we're able to establish our distribution model in the western half of the US. Ted will be reviewing the progress on expanding our distribution capacity here in just a moment.

For clarification, the 0.8% positive comparable store sales results we experienced in the fourth quarter at CSK does not include the stores that have been converted post-conversion. They are part of the CSK comp base up until conversion and O'Reilly post-conversion. So, we're even more encouraged that the CSK stores that have not been converted have performed much better as a result of the higher focus on customer service levels, commercial relationships, better retail pricing, as well as some deployment of inventory.

Most of the pricing changes that were incrementally made in the fourth quarter and have continued into our first quarter, were reduction to our retail pricing, which were needed to get our prices competitive on a by market basis. CSK was simply not competitively priced and we're now well down the road with these pricing corrections. These changes vary by region but cumulatively have resulted in a 2% to 4% reduction in our overall selling price at CSK which was anticipated and fully evaluated as part of the acquisition.

During the fourth quarter, and continuing into the first quarter, we have incrementally added some much needed inventory coverage to all CSK stores but more specifically to approximately 120 CSK stores we felt would benefit most from an immediate and broader improvement to inventory coverage. Several of these stores act as hub stores which make the expanded inventories available to their surrounding stores. These improvements in conjunction with the pricing changes we have made have contributed to material improvements in the performance of these stores.

For the period of November 17th, when these deployments really got under way through last week, these 120 CSK stores have generated 6.1% positive comparable stores sales. This sales number includes only the retail sales at those individual locations and does not reflect any intercompany transfers to surrounding stores. Overall, we're extremely encouraged by the early success we've had with the CSK conversions, and while the majority of the work to fully convert CSK to our business model is still in front of us, we're very, very pleased with the early results of our efforts and are more encouraged than ever with the potential of our newest stores.

As we begin 2009, we're obviously somewhat cautious due to overall economic conditions, but extremely encouraged by our performance in the fourth quarter, and the success of our CSK conversion efforts to this point. We're also very encouraged by the continued strength of our comparable store sales to this point in 2009.

Like I mentioned earlier, the trend that we were on in the fourth quarter has continued into the first quarter and even considering the fact that we lose a day in the first quarter of this year, due to last year being a leap year, we're very comfortable with the 2% to 4% comparable store sales guidance for the first quarter, comprised of 1% to 3% positive comparable stores sales at CSK and 2% to 4% in the core O'Reilly stores. Again, I want to thank all members of team O'Reilly for the great job in 2008 and for all the effort all of our management and field teams are putting into the CSK conversion projects.

I'll now turn the call over to Ted Wise, our Chief Operating Officer for some additional comments.

Thanks, Greg, and good morning everyone.

I would like to begin by summarizing our store expansion in the core O'Reilly stores in the fourth quarter and for 2008. We installed 27 new stores in the last quarter bringing us to 150 new stores for the year, resulting in a total of 3,285 stores. We adjusted our growth back from a projection of 200 stores at the beginning of the year, to 150 stores at the announcement of the CSK merger which allowed our store installation department to begin the Checker store conversions in the fall.

In addition to the 27 new stores last quarter we also moved 11 stores to new locations and renovated two stores. For the entire year we moved 33 stores to new locations and renovated 66 stores. We also installed the store interior upgrade program in 177 stores which completed the store image upgrade program we began back in '07. I also might mention that in addition to the CSK merger we purchased six independent stores for 4% of our new-store total growth.

In regard to the expansion by market area , the fourth quarter growth included 17 different states with North Carolina, Ohio, Wisconsin, and Louisiana leading with three stores each. For the year our expansion reached into 25 different states with Texas, once again, leading with 23 new stores. Other key growth states were Georgia with 16, Ohio with 14, Indiana with 12, Wisconsin with 10, and North Carolina and Minnesota both with nine new stores.

As announced we have another 150 new stores planned for 2009 and at this point it looks like 60 of them will be installed by the end of the first quarter. In addition we have four store relocations scheduled during the quarter.

In the distribution area we opened our fifteenth distribution center in Lubbock, Texas, in November. It was a very successful opening, allowing us to be -- more efficiently service a group of existing O'Reilly stores that was previously serviced out of the Houston and Dallas DC and also serviced the CSK conversion stores in El Paso, Texas, and Albuquerque, New Mexico. The work to convert the CSK Detroit distribution center is going well and we are on schedule to change over and go live with our systems in late April.

We're also on schedule to open our new distribution center in Greensboro, North Carolina, in May, which will support much of this year's new store expansion into the Carolinas and Virginia. Also existing stores will be transferred to Greensboro from Knoxville and Atlanta, which will be much more cost efficient and give us the room for additional expansion out of those two DCs. We're now delivering nightly to all converted Checker stores in the northern states out out of our Minneapolis and our Billings DC and are in the process of vacating the DC that CSK operated in Minneapolis.

In the west, our distribution expansion plans are on schedule and going very well. We have been fortunate to find distribution centers in southern California, Seattle and Denver. All are new buildings and the ideal size for the number of existing stores and projected growth in those market areas. These are the first of four anticipated distribution centers which along with the northern California and the Phoenix CSK facilities, will be required to implement our dual-market strategy in the CSK markets. Our distribution goal is to have the new DCs open and the existing CSK operations converted at the end of 2010.

Now we'll take a few minutes to update you on the CSK to O'Reilly store conversions that began last September. At the end of the year we had merged 28 CSK stores and O'Reilly locations, moved seven O'Reilly stores into CSK locations, and converted or changed over 51 CSK stores to O'Reilly inventory and system. By the end of this week we will have merged another four stores and O'Reilly locations and completed another 53 CSK to O'Reilly conversions.

We will have approximately 145 stores finished including all of the Checker stores in the northern states, and we are moving forward with an eight-store-per-week conversion schedule in the New Mexico Checker stores, and in the Chicago Murray stores. The Murray stores will receive nightly service out of our Indianapolis distribution center.

At the end of April we will have completed 226 store conversions, which is when we convert the systems at the Detroit distribution center and the remaining 79 Murray stores. The inventory and planogram conversions in the Detroit metro and Ohio Murray stores, will immediately follow the computer conversion and be scheduled to be completed by late August. In less than one year we will have physically converted the inventory and the systems of 305 CSK stores in the ten states that we are -- are serviced out of O'Reilly distribution centers, and completed the CSK Detroit DC conversion to O'Reilly systems. This is an amazing accomplishment by our store installation, distribution, and corporate team members, as well as all of the O'Reilly team members in the stores and field who have volunteered to help out with the changeover and the training support needed.

The next phase of store system changeovers will not include inventory lifts since lineup dates and changeovers are underway and a majority of the work will be completed. The stores will be converted to our computer systems, nightly delivery, and have access to more parts at the time we open each of the new Western distribution centers. That schedule is expected to start with 193 Schuck's stores following the opening of the Seattle distribution center in November.

We plan on opening the new distribution center in southern California in January of 2010, which will allow us to start the conversion of another 232 Kragen stores. Denver will be scheduled in February, which will allow us to convert the 90 area stores and the last location is projected to be in Salt Lake City with an opening date in May allowing us to convert another 85 stores. After these DC openings and store count, the -- had been reduced at the Phoenix and Northern California facility, we can then proceed with converting these two distribution centers to the O'Reilly system, and then we can start the conversions of the 273 Northern California and 158 Arizona area stores to nightly replenishment schedule in the O'Reilly systems.

While our store conversions have definitely been the main focus for the past eight months, at the same time we've also been very busy implementing a number of other programs in all of the stores to immediately improve the business from CSK areas. The additional inventory placed in the 120 key installer stores and increasing the number of hub stores that provide better inventory availability to a larger group of stores, and the surrounding area, are definitely having positive sales effects. Along with improving the wholesale business, is better inventory level and a more market-competitive DIY pricing will continue to bring in new customers as well as bring back old DIY customers.

For us to provide better store operation and sales support we have restructured the district manager and regional manager store groups to allow management more time in the store. Sales management has been reorganized and territories are now designed to increase productivity, and (inaudible) the number of installer (inaudible). We have completed individual store business assessments and implemented the O'Reilly goal setting process in all CSK stores to focus on profitable sales growth and increased productivity. There had been and will continue to be a tremendous amount of O'Reilly training, which is necessary to convert the CSK team over to the O'Reilly dual-market plan.

During this transition we have been very pleased with the positive attitudes, good support and overall acceptance of the O'Reilly programs by the CSK stores, distribution centers and management team. The CSK team and the O'Reilly team are truly becoming one team with a goal of providing higher customer service levels. This winning positive attitude, combined with additional sales tools have been the primary reason for the success to date in our business.

Our real estate team and store operations team continues to aggressively evaluate all CSK markets for both relocations of existing stores and future new-store expansion. CSK stores were all leased which gives us the opportunity to upgrade some of the stores. Also in these older locations many leases have reached mature and higher rates which are often not competitive in today's real estate market. We will continue to pursue opportunities to renegotiate leases and look for possible relocations that will reduce our lease expense and improve our overall store profitability and locations.

Now from a marketing and advertising standpoint we have converted all CSK programs over to a co-branding format with O'Reilly, in print and radio, along with any other marketing events around the stores. CSK relied heavily on print so we will continue a strong print program and align the message with O'Reilly, aimed at building the image of everyday low prices, quality parts and great service levels. In addition, we'll expand radio in the CSK markets to the same level as we have in the O'Reilly markets. And, again, all print and all radio will be co-branded O'Reilly.

This month all CSK team members will receive green O'Reilly uniform shirts and all stores are carrying O'Reilly private label antifreeze, oil, and other chemicals. Our co-branding strategy will continue throughout the store conversions and provide us a smooth and seamless transition to the O'Reilly brand.

The decision on the timing of changing exterior signs will follow the inventory changeover and store conversions, allowing for plenty of time for sufficient team member training and adjustment time to our store systems. We continue to feel that Checker, Schuck's, Kragen and Murray's, are strong brand and we will look for every possible opportunity to ensure the transition to O'Reilly is successful.

Also I would like to announce that we have entered into a new O'Reilly marketing relationship that names O'Reilly the official auto parts store for NASCAR. We have considered motor sports the pillar of O'Reilly marketing and is defined by our involvement as title sponsors of six NASCAR events and secondary presence in an additional nine NASCAR events. In addition, we are title sponsors of eight NHRA events and a huge number of local and regional racetracks as well as over 90 large regional car show events. Our new associations with NASCAR as the official auto parts store further strengthens our relationship and tie to the motor sports fan, that we consider to be the serious DIY customer and installer customer, both of which are the backbone of our customer base.

In addition to motorsports we continue to be very involved in college basketball and other various sporting events. At the point that the O'Reilly brand becomes national and the combined companies are advertising under a national footprint, our existing programs will become much more cost effective and will have additional opportunities to expand our advertising marketing and national ways.

I would like to finish by saying that we appreciate the great job the core group of O'Reilly stores are doing. And especially the strong sales results last quarter and for the year. With all the focus the Company has put into the CSK merger, our core store team members has had to step up and take another level of ownership in running their store, districts, regions and distribution centers. Through everyone's hard work and commitment we finished the year strong realizing that our team always wants and thinks that we can do better.

Last week we attended our yearly management conference in Dallas with over 2,800 team store members. Our team left Dallas with a win-win attitude. I feel confident that through hard work, commitment and giving great customer service, we will continue to grow market share in these difficult times of our economy. Now, I will turn it over to

Thanks, Ted. I'd like to take a second to thank our finance teams in both Springfield and Phoenix. Your dedication through weekends and late nights for our first year end consolidated close is a great example of the O'Reilly culture.

Now I'll move on to the numbers. For clarification, stores converted from the CSK brands to the O'Reilly brand are included as CSK sales store prior to the conversion and in O'Reilly sales after the conversion. For the calculation of comparable store sales, we use the same methodology with stores included in the CSK comp base before conversion and included in the O'Reilly comps on the second day the stores reopened, since your first day included in comps is a full day of business.

With that said, sales increased 84% to $1.1 billion for the quarter. The increase was driven by a 13% increase in O'Reilly stores, and sales of $433 million at the acquired, yet to be converted, CSK stores. For the quarter, comparable store sales for the stores opened greater than 12 months increased 6.2% at O'Reilly stores, and increased .8% at the CSK stores. On a consolidated basis comparable store sales for the quarter increased 4.0%.

2008 full-year sales increased 42% to $3.6 billion. This increase was driven by a 9% increase in O'Reilly stores, and sales of $832 million at the acquired yet to be converted CSK stores. 2008 comparable store sales for stores opened greater than 12 months increased 2.6% for O'Reilly stores and decreased 1.7% at the CSK stores since the acquisition on July 11th.

On a consolidated basis, comparable stores sales for the year increased 1.5%. Gross profit was 46.2% of sales for the quarter versus 44.7% in the prior year. The improvement was driven primarily by the influx of higher margin CSK sales, which are driven by a higher mix of DIY sales and market-specific conditions, offset in part by adjusting CSK's prices to more competitive levels. In addition, on our last quarterly conference call we estimated full-year 2008 product merchandise acquisition cost savings attributable to the acquisition to be $5 million to $10 million. And we realized results in the higher end of that range.

SG&A for the quarter was 39.0% of sales versus 34.2% in the prior year. The 480 basis point deleverage is driven by the following factors -- the CSK stores have a higher expense structure than core O'Reilly due in large part to the geographic locations of the stores and because all of the CSK stores are leased. SG&A includes a non-cash charge of $2.8 million for trade names and marks as a result of purchase price allocation. This charge will be reduced to zero over time as we convert the stores to the O'Reilly brand.

SG&A also includes one-time non-cash charge of $9.6 million to align the CSK vacation policy with the O'Reilly vacation policy. The former CSK vacation policy was an earn-as-you-go policy. The O'Reilly policy vests team members with a full year of vacation on their employment anniversary date. As a result of this annual grant process, we accrue team members following year vacation in the current year. We spent a significant amount of time comparing and contrasting the two policies and determined the O'Reilly policy is better at awarding long-term team members and in the long run is more physically advantageous for the Company.

Excluding the charges for trade names and marks, and the one-time charge for the changes to the CSK vacation policy, SG&A for the quarter was 37.9% of sales, versus 34.2% in the prior year. On our last quarterly conference call we estimated the full-year 2008 SG&A synergies would be approximately $7.5 million and we were able to achieve that savings. That interest expense for the quarter was $13 million, with $2.3 million of that number representing amortization of debt issuance costs. To the extent our debt is not swapped to fixed rates, lower LIBOR rates during the quarter had a positive impact on our interest expense.

The tax provision was 37.8% of pretax income for the quarter versus 37.1% in the prior year. The increase is due to the CSK stores predominantly operating in higher tax rate states offset in part by resolution of certain tax uncertainties. Excluding one-time costs which we'll discuss more in a moment, adjusted EPS for the quarter was $0.37 per share which represents a 6% increase from the prior year.

For the year, adjusted EPS was $1.64 per share which represents a decrease of 2% from the prior year. The one-time acquisition-related items net of tax that are creating significant noise in the 2008 results were -- the $4.4 million debt prepayment costs was the cost of the call premium on our $75 million private placement note. The calculation of the comp premium was driven primarily by T-bill rates and is thus negatively impacted by the low T-bill rates at the time of the acquisition.

The $2.6 million interim facility commitment fee was the cost of the banking commitment to finance the potential debt facility beyond our asset-backed loan facility. When the transaction was switched to a tender offer this interim facility was no longer needed but having that financing commitment was an important part to negotiating the acquisition. The $3.1 million one-time adjustment to tax liability was a direct result of the acquisition.

On a go-forward basis we expect our consolidated tax rate to be 38.2% to 38.5% of pretax income, with the increase over our historical rate driven by higher tax rates dates, which are primarily locations of CSK's operations. The $3.3 million amortization of trade names and trademarks as a result of a portion of the purchase price being allocated to trade names and marks in accordance with the Statement of Financial Accounting Standards 141. The length of this intangible asset has a short life as we plan to convert all stores to the O'Reilly brand.

As a result this asset originally valued at $13 million will be written off via a non-cash amortization charge over the next two years. Because the amount of stores operating under the CSK brand names will sequentially decrease quarter after quarter as we convert stores, the amortization charge is front loaded with the first quarter of 2009 being a pretax charge of $2.2 million and the last planned quarter, the third quarter of 2010 being a charge of $0.1 million. The $5.9 million one-time charge to line the CSK vacation policy with O'Reilly was discussed earlier. And, again, these figures that I've just given are all net of tax.

Moving on to the balance sheet, the core O'Reilly average per-store inventory at the end of the year was $489,000. This was a slight increase from the $482,000 as of last December. For the CSK stores, the average per-store inventory increased from $417,000 at the date of acquisition, to $461,000 at the end of December, which represents a 13% increase. This increase is a result of our ongoing process of adding much needed hard parts inventory and eliminating non-core automotive merchandise in the CSK stores.

Accounts payable of $737 million was 46.9% of inventories, compared to 43.2% in the prior year. We continue to work to improve the vendor terms but the dramatic year-over-year increase is primarily driven by the initial stocking orders and the hard part lines of the CSK stores.

At the end of the year, borrowings under our asset-backed revolver were $614 million and the calculated availability was $454 million, so our liquidity position remains very strong. Now for some other financial information.

EBITDA for the quarter was $131 million, 11.7% of sales versus the prior year of $88 million which was 14.5% of sales. Year-to-date EBITDA was $466 million, 13.0% of sales, versus a prior year of $390 million which was 15.5% of sales. Operating cash flow for the quarter was $9 million compared to $18 million in the prior year. And for the full year operating cash flow was flat with last year at $299 million.

For the year, our cash flow from operations was negatively impacted by a net inventory investment of $92 million which was driven primarily by our efforts to increase the first store inventory at the acquired CSK stores. Free cash flow for the quarter was negative $72 million compared to negative $46 million in the prior year. For the full year operating cash flow was negative $43 million, compared to $17 million positive free cash flow in the prior year.

The use of cash was driven by the inventory investment to begin this CSK inventory update and CapEx which included $49 million of CapEx incurred to unwind our synthetic lease which was part of our acquisition process. Capital expenditures for the quarter were $81 million compared to $63 million in the prior year. For the full-year CapEx excluding our synthetic lease buy-back were flat -- relatively flat with last year at $292 million compared to $283 million in 2008.

Stock option expense for the quarter was $2.5 million, compared to $0.7 in the prior year. For the full year stock option expense was $8 million compared to $5 million in the prior year. The year-over-year increase was driven primarily by options issued in connection with the CSK acquisition.

To finish up our prepared remarks let's review the 2009 guidance. For 2009 our comparable store sales guidance for O'Reilly, CSK, and consolidated, is 2% to 4%. The O'Reilly comps include the converted stores as soon as the stores reopen after conversion. Based on the negative comps experienced in the first month after reopening due primarily to training issues as discussed by Greg earlier, and the converted stores only representing 4% of the weighted average O'Reilly store base for 2009, the impact of the converted stores on overall O'Reilly comps is not significant.

The CSK comps will be positively impacted by the additional hard parts added throughout the year. The CSK comps have already been and will continue to be very positively impacted by the hub stores we've added, and will continue to add through the end of the first quarter of 2009.

[Overall], the new guidance for 2009 is $4.7 billion to $4.8 billion. Gross margin for 2009 is estimated to be 47.0% of sales, which is a 150 basis-point increase over the prior year. This increase is driven by the full-year impact of the higher CSK gross margins generated through a higher retail mix and geographical differences and the impact of product merchandise acquisition cost savings. We expect the additional incremental product merchandise cost savings to be $50 million in 2009. These savings will be -- will build on a quarter by quarter basis as we align the chain-wide product offering. We expect 2009 SG&A synergies to be $7.5 million to $12.5 million on top of the $7.5 million we realized in 2008. Interest expense for 2009 is expected to be $53 million to $56 million, with 8.6 being the non-cash amortization of debt issuance costs.

Capital expenditures for 2009 are estimated at $420 million to $470 million. Built in the CapEx spend will be highly dependent on our own versus lease mix for both new stores and new distribution centers as well as the rate at which we convert stores. This level of CapEx is higher than we originally planned for 2009, due to our rapid success in finding suitable locations for our distribution center growth. However, the overall CapEx for the conversion continues to be within the range of our expectations.

Depreciation for 2009 is estimated at $130 million to $145 million. Within the range the expense will be driven by the level of 2009 CapEx spend. We expect that we will incur an additional $80 million to $120 million in debt under our [EBL] during 2009. Based on our additional borrowing base created during 2009 we project we will availability under the [EBL] of $350 million or more on its monthly basis.

Our GAAP EPS guidance for 2009 is $1.80 to $1.84 on 136.6 million expected shares. Excluding the non-cash charge for names and marks which is the only acquisition related charge we expect to take in 2009 we expected adjusted EPS to be $1.83 to $1.87 for the year. For our quarterly guidance, our comparable store sales guidance for CSK is 1% to 3%, and comp guidance for both O'Reilly and consolidated is 2% to 4%. This comp guidance is given based on the progression of the quarter thus far and with the consideration for the negative impact of comparing against the leap year in 2008 offset in part by the positive effect of the Easter holiday falling in the second quarter in 2009, versus the first quarter in 2008.

Our EPS guidance for the first quarter of 2009 is $0.35 to $0.39, on 136.0 million shares. Excluding the non-cash charge for names and marks we expect EPS to be $0.36 to $0.40.

At this time I would like to have Don the operator come back and we'll be happy to answer your questions. Don?

(Operator Instructions) And your first question comes from the line of Alan Rifkin with Bank of America.

Thank you very much, congratulations on a good quarter, guys. I appreciate all of the clarity on CSK. Just I have a couple of questions. Is there any reason to believe that the remainder of the stores to be converted in 2009, won't possibly take a similar path of the stores that you've converted in the last 16 weeks with respect to the comp breakdown that you gave us by week?

Well, the only unknown, Alan, of course, is just the economy in general. We're going to be doing all we can on this end to make sure that the stores perform as the stores that we've converted have performed, and as you said we have every expectation that we would continue to see the performance that we have had with the converted stores. Again, with the economy like it is, it's hard to be real aggressive in comparable store sales guidance with the overhang of unemployment and just the economy in general.

Right. But putting the macro aside, of course, Greg, which none of us really know what's going to happen. With respect to the stores that have been converted so far, there really wasn't anything unusual about that group of stores in terms of their performance being particularly poor before the conversions. Is that correct?

Well, that's correct. One thing to consider is many of these stores that we have converted to this point are in markets where there are O'Reilly stores already, and that are being serviced by the O'Reilly distribution center and the O'Reilly brand is established and recognized. Some of the stores that will convert starting here in the next couple of weeks are stores in the Chicago area where the O'Reilly brand isn't recognized, so we'll have a little bit of a new challenge there. And I guess our success with those conversions is yet to be seen, but we have every reason to believe that we'll have similar success in those stores. But, again, there is a little bit of a branding issue there, that we have not had the opportunity to establish the O'Reilly brand in Chicago and Detroit as we have in some of the other markets.

(Operator Instructions) And your next question comes from Tony Cristello with BB&T Capital Markets.

Thanks, good morning, gentlemen.

Good morning, Tony.

Question is when you look at resources that you allocate to the conversion of CSK, but yet simultaneously allocating resources to Greensboro and opening up 150 stores, can you talk about -- you run pretty lean. Can you just talk about how you manage that process, and I'm assuming with the bulk of the conversions for CSK, the west coast starting in the second half, will the store openings be more first-half weighted as well?

No, they should be spread pretty evenly throughout the year. The way we do this Tony, is we have teams that go out and set up -- and do the conversions.

For the conversions, particularly, we have used an outside company that provides us some help in resetting the fixtures and setting up our display planograms and so forth, and then we have manufacturer help in setting the back-room inventory and just a lot of the handling that has to take place in lifting and placing the inventory, and so forth.

And then separately we have our new-store teams that continue to operate as they have operated in our new-store expansion. It's certainly a challenge and our Company obviously has more going on from an expansion standpoint than ever in our history. Probably the most challenging part of this will be the setup of the distribution centers that have to be accomplished with the Greensboro opening. We're moving a distribution center in Kansas City to a larger location that will allow us to continue to grow up there. And then the four distribution centers that we're opening out west -- that will be the most challenging part.

But we feel like we have the teams lined up that can do that. We have help from an outside vendor that helps us with the material handling equipment and the distribution centers and the setup of just the storage facility in general. So we have a good plan in place to accomplish that.

Simultaneously, you run lean anyway but it doesn't seem like it's a problem in general.

Well, it's real hard work. There's a lot of people that are just putting in tough weeks back to back to back to get this done. And we've run lean for a long time. But we have figured out that we can do it and we've got teams in place that are accomplishing it one week after the other and we don't see a problem in completing this at the pace that we're on right now.

Our next question is from Scot Ciccarelli with RBC Capital Market.

I apologize, if you guys had mentioned this, but obviously when you do -- convert one of the CSK stores to an O'Reilly format, you've seen big comp gains. Did you guys break out whether it was from DIY or from commercial, or is it a combination of both?

Well, it is a combination of both. Our commercial business comes on a little quicker right off the bat than our retail business does typically because we're able to go out and gain that business, whereas you kind of wait for the retail customers to come to you through your advertising and marketing efforts and so forth. So that's kind of the case across the board for us as we open a new location.

After just 16 weeks, then, it's probably fair to assume the bulk of that is because of the incremental commercial business?

Yeah, that's part of it and then on the retail side of course, many of the markets that we have converted stores, it is the dead of winter up there, and that's obviously not a great retail time, anyway. So that's a contributor, too. Maybe some of the commercial success over the DIY success.

Your next question is from Scott Stember with Sidoti.

Good morning.

Good morning, Scott.

Could you talk about throughout the month trends particularly interested around the Christmas time, if you saw any delay in trends to your customers?

Well, the quarter in general was pretty solid throughout the quarter. We came out of the third quarter on a decent pace. It did accelerate a little through the quarter. December was the best month of the quarter. We had pretty easy comparisons to December of last year, because last -- December of 2007 was very soft, but December was the strongest month of the quarter.

And as far as wholesale versus resale I'm hearing anecdotal evidence of the commercial side is doing better with some of the other company's recovering. Can you confirm that in the quarter?

Well for core O'Reilly, they ran very close. The core O'Reilly stores in whole as we said ran a 6.2% comp and both retail and commercial performed very well and both were right at that level. The CSK stores, the commercial comp is substantially better than the retail comp.

And your next question is from Dan Wewer with Raymond James.

Greg, I was trying to make a guesstimate on the profit flow-through from the mid-teen sales increase you're seeing in the converted stores. Could you talk about how the cost structure in those stores is changing and how you see that that profit flow-through looking like. And as a follow-up question before he cuts me off, can you talk about how the change in the pricing strategy and the converted stores is impacting the gross margin rate?

Well, from a -- just a profit standpoint in the CSK stores the things that we're doing, are we added these leases come close to, coming up, and we're trying to negotiate more market-appropriate leases for today's real estate environment. So we work on that ongoing as a means to bring the cost of the CSK stores down, and we've also implemented our process of evaluating the staffing needed at the stores to run both the commercial and the retail sides of the business, and are very analytical when it comes to the payroll that we allocate based on the sales potential, and that's under way. As far as the profit flow-through, Tom, you might be able to speak better to that than I relative to the P&L.

When we look at converting these stores, in general CSK had not staffed their stores to grow the business, and we have to have people there that can go call on customers and wait on customers to grow the business. In addition to that you'll have a better commercial presence, so initially there is investment for these stores to convert them to the dual-market strategy. So we're not seeing a big change in their profitability. We need to continue to grow the business and grow the commercial business to get the leverage we're looking for.

And then, Dan, before we finish, the second part of your question was relative to pricing and the effect on those stores. The pricing adjustments that we've made, have, as I said -- have been generally about a 2% to 4% decrease in pricing across the board. That is mostly offset by the benefit that we have buying as a larger company. But it has some effect, because in many cases we've not changed the product lines and don't have full benefit of that, yet. Right now it has some effect. To quantify it, I don't know if you have a quantification of that, Tom.

It is difficult to quantify -- we don't have a huge population. What we saw when we looked at CSK in the due-diligence, and what we have seen in previous acquisitions, is we need to go in and get them competitive and drive volume. That is a challenge from a comp standpoint. We have to turn more units to make the same sales dollars, but we need to re-establish the stores as -- A, having good availability; and, B, having good competitive pricing.

I might add that we're seeing a product mix change in that we're going to sell more hard parts now that maybe that are more competitive than what CSK was selling them. But the fact was that they weren't selling them. So we'll see hard parts sales grow that is typically at a higher gross margin than a lot of the retail will, the accessories.

And your next question is from Michael Baker with Deutsche Bank.

And so one question, in a follow-up, at the same time here, one on the CapEx. Can you break that down, 400, whatever, the $420 to $470 - can you break that down by DC, new store, store conversions, et cetera. And I guess related because it's all about the integration -- your $100 million synergy number -- it sounds like you're at least on track for that through '08 but I'm just wondering -- the comp growth that you're seeing, is that as expected or better than expected and therefore can there be upsides to the synergy.

I'll answer the synergy question first as Tom's getting the detail on the CapEx question.

What I would say is that we've probably -- overall we didn't -- in our guidance we only -- given guidance to negative comp store sales growth in the fourth quarter for CSK based on -- one, the unknown as we convert the stores and just the state that the stores were performing in from a comp guidance perspective. So I guess what I would say is that we have been very pleased with the performance so far.

If our experience with the stores yet to be converted and then the effect of the inventory changeovers that we do out west -- if we do continue to have results similar to what we've had so far, then, yes, we would do better than what we're guiding to. We're just trying to be cautious, because all of this is unknown at this point, and there is the economic overhang that of course we all have to consider.

Right. Thanks.

On CapEx, Tom ?

On the CapEx still a big range out there. I would tell you that right now we're looking at about half of the CapEx spend being on distribution infrastructure, and the remainder being on stores and a little bit of headquarters thrown in there.

And your next question is from Christopher Horvers with JPMorgan.

Thanks, guys, good morning.

Good morning.

A follow up question to clarify 2% to 4% price declines in CSK stores, does that mean that you would have comped that much higher [X] those price declines in the convert -- non-converted CSK stores? And then second, the 0.8% comp in those stores, can you talk about the amount of inventory you that you've added on average to the non-converted CSK stores? You talked about 15,000 SKUs in those stores, O'Reilly stores about 21,000, where have you taken levels in those stores? And as we look forward, where do you think you can get them in the absence of new DCs on the west coast?

Well, on the price changes and the effect that that has on comps, obviously that has some effect. We have to sell more units. The difference is the product mix change.

We're selling more hard parts today than we were in our inventory deployment and pricing strategies. Primarily focus on hard parts although we've made the upfront merchandise or the merchandise in front of the counter competitive also. But, typically, we focus more on the hard parts.

So, yes, had we been able to sell the inventory that we sold last quarter at the price they were selling it at before we would have comped much better reflective of the price decrease. Tom, you want to answer the second part of the question?

One thing I would add on the prices is that we're in the process of converting CSK from a high-low retailer to everyday-low-price. So when we talk about the 2% to 4% price changes that is on the everyday price. And then we're going to be a little more rational on what the advertised price is.

That's right and then our commercial pricing of course has stayed -- they were -- we're very competitive on the commercial side, so there is -- that 2% to 4% I referenced does not include the modifications that we might have made to the commercial pricing.

Christopher, can you -- on inventory levels -- the comments that I had made in my prepared remarks that the average O'Reilly stores at 482 and the average CSK at 461,000, gives you an idea of how close we're getting. CSK probably still has the $10,000 to $15,000 of merchandise that we're not going to go -- carry on a go-forward basis. That gives you kind of a gross number.

We have a lot of work to do to get the lines all in place. What we're seeing is that CSK carried more depth of coverage because they were only delivering once a week, whereas we carried more breadth and deliver five days a week. So we have quite a bit of work to do, which really starts here in February in earnest to align the inventory offerings across the chain.

Just to add a little bit to that, the 120 stores that we mentioned that we have expanded inventory in, we have primarily brought those up to what an average O'Reilly store inventory would be. With the exclusion of some of them being hub stores which would have been brought up to a -- approximate hub store inventory -- which would vary by location depending on the amount of space they had and so forth. And also the size of the market that that hub store might be in. Because part of the effort with the hub store is not only to service the population around that particular store, but to make inventory available to other stores. So some of those stores could have gotten up to 30 to 35,000 SKUs or could be up to that point by now.

And your next question is from [Jack Balos] with Midwood Research.

Regarding the changes you've made in CSK advertising, how does that end up in term of a ratio to sales? My other question regarding CSK is in California, considering the economic weakness there and 9.5% unemployment rate, what has been the impact in California from those conditions on CSK's retail sales?

Well probably the strongest part of CSK for us -- not including the stores that are being converted here in the center of the country -- the strongest region for us has been the northwest and the weakest region has been the southwest which includes part of California.

I would say that we have a lot of opportunity in California. There were some underperforming stores there that just have not maintained the market share that maybe they had back a few years ago. They have not grown market shares for years. They've probably lost market share so we have a lot of opportunity. So I think we probably have not been affected directly by the state of the economy in California because of the market share gains that we can make, and the pricing changes that we've made with some inventory deployment and making inventory available to the spoke stores around the hub has more than offset the economy there.

As far as the CSK advertising sales ratio, and so forth, we really haven't done a lot of advertising out there yet. We kind of slowed down some of the promotional things they were doing. In the winter season it is not a heavy advertising time of the year for our business -- CSK had previously done that. So we really haven't had a lot of experience yet with the impact of our advertising efforts. That really is kind of right now kicking off as we start our 2009 advertising campaign year.

And those -- our advertising campaign with CSK will mimic what we've done with O'Reilly, and will include print, radio, price -- attractive items, generally on the front page with oil-change specials and motor oils and the most commonly used items in our business. And then more hard parts and the various ancillary items in the rest of the flier. And then our radio advertisements are of course just advertisements to improve our brand awareness and then to drive footsteps into our stores with various specials we might have.

I might add that going from what we have done and the response from the team members while it may be too early to actually see it in dollars, the attitude and the buy-in of how we're advertising, compared to the old CSK high-low, like Tom referred to, is very positive and they all feel to be received well by the customers going forward.

Regarding the Southern California stores that you say are lower average volumes. Can you give us an idea roughly speaking, are they 10% lower volume per store? Any idea? Any idea what you're growing from?

If I said they were lower average volume I didn't mean to say that Jack. What I meant to say is that that is the challenging area for us to grow comparable store sales in right now. Their average volume is actually pretty good if you look at it on a comparative basis to O'Reilly. Now, they've got a higher fixed cost out there. And I didn't answer part of your question earlier, I just realized, relative to the volume that we think we can get those stores to.

Kind of our plan on average is that these western stores would get to a volume of about $2 million, or so, on average, as we do a better job on the retail side of the business. Because it frankly -- CSK just hadn't done the job primarily for two reasons. One, availability of inventory and, two, their pricing strategy. So we feel we have much retail market share to gain.

And then our commercial program will clearly be much more successful there than what the commercial program CSK was using. I guess to explain maybe the commercial position that CSK was in, when we bought the company, what CSK reflected as commercial store sales was reflected as being about 18% of their sales. The way we would measure commercial sales, that would equate to about 10% of their sales.

Some of what they looked at as commercial really were just good cash customers that were being considered as commercial customers when really they aren't running a business that we would consider to be a commercial business. So we'll gain market share on both and our goal and plan is to get those stores to about a $2 million average.

And your next question is from Gregory [Melich] with Morgan Stanley.

[Von Tonney] in for Greg, thanks for taking my call. I had two questions for you. First, on a free cash-flow standpoint, understanding that the CapEx has quite a bit of variability, is there an overall number that you may have provided that I would have missed and how should we think about that for the next few years?

The number -- I guess we've given it in a little different fashion -- we expect to have negative cash flow of about $80 million to $120 million. We referred to it in what our debt levels would be next year. We would expect that with a bunch of the CapEx being pulled really from 2010 to 2009 with the success we've had on finding distribution centers, that we return to positive cash flow in 2010.

Okay. Great. Thanks. And then the other question I had was just on SG&A. It sounds like some of the synergy opportunities there are pretty substantial, sort of as we had thought.

I was hoping you could detail a little bit more what rolls into that. Specifically are some of the leases included there that are up for renewal and/or the Phoenix headquarters. Anything you could share there would be great. Thank you, guys.

SG&A synergies that we talked about would be focused on the headquarters expense in advertising. And as we transition over to the O'Reilly system, and we need fewer people to maintain the CSK system, and as we implement the O'Reilly advertising strategy, we'll continue to see those savings incrementally increase.

One thing that I think was asked on a previous question that I don't think we addressed directly was that we continued to be confident in our ability to reach $100 million of annual synergies starting in 2010. And I think the numbers that we've given in our guidance show good progress to that in 2009. The items that we want to focus on is that the buying synergies will incrementally improve as we align the products, so until we change over a specific product line, across the chain, or line it up, we won't have the best feel. That's why when we look at the fourth quarter, we'll have the most buying synergies as a percent of sales.

And your next question is from Brian Nagel with UBS.

I want to follow up on an answer to a prior question, and you mentioned real estate as an opportunity. Earlier today I was on one of your competitor's conference calls and they highlighted something similar, actually in their press release as well -- a potential renegotiation of some of these leases. I was wondering as we look at CSK integration, do you think potential renegotiation of some of these leases could occur, and if so, could that be a meaningful driver to upside your initial synergy estimates for the business?

Well, we're in the process right now of dealing with the leases as they mature, and they obviously being 100% leased, and older stores on the west coast, there is a large class of store leases maturing almost on a monthly basis so we're dealing with those one at a time, and our effort is obviously to renegotiate the following term at a better rate, more of at a market price. Of course that varies from store location to store location. And then we're going back and looking at other options to relocate, cut down square footage, of a lot of their stores were in large square footage that that in itself drove up the lease price more than what it needs to be for today's auto parts store. So we're looking at all options of reducing our (inaudible) cost. And including relocating out of some of the older locations to better facilities at or better lease rates than what they have currently got in the stores.

So would those then be as we've obviously had a shift in the real estate market recently. Would those type of synergies be incremental to the initial estimates of the synergies for the business?

They would. That would be something that we would not have included in our initial observation of potential synergies just based on the fact that at the time it seemed as though the leases were the leases and it was something that we would live with, and we were able to gain comfort with our opportunity to grow market share out there and drive volume that could leverage their existing leases so these renegotiations would be potential upside to our original synergy estimates.

It is going to be a process that takes a year to two years to get through the evaluation.

Thank you. Our next question is from Colin McGranahan with Bernstein.

Thank you. And thanks for running over a little bit here to get a lot of questions in.

You bet.

A few quick ones. One, in the core O'Reilly business, can you talk a little bit about what you saw in terms of comparable store transactions and pricing, or essentially what the explicit inflation pass-through was. That is the first question.

Secondly, on the CSK comps post-conversion, it looks like it has settled into a 15%, 16%, 17% range, and I know it's early, and there are a lot of unknowns here, but would you expect that then to build a bit through the first year as the retail business picks up and you start to build those commercial customers? Obviously to get to $2 million kind of volume in some of those California stores you need about a 30% or 40% increase in productivity.

So is that 16% or 17% then going to accelerate, and then you have another year of 15% to 16% to get there? How are you thinking about that at this point, understandably with just under four months under your belt.

And, to your point, Colin, what we can speak to is basically our experience so far which these stores being converted, the time of year that we've converted them, is not the best time of year to lean on the sales results and project forward, because in the dead of winter in these northern states business really slows down. But we have been very pleased with the double-digit comp growth that we've had once the stores gain traction.

To your point, we really would expect them to -- at different points in their progression, to becoming a real O'Reilly store -- to do better than that, as we start gaining commercial business, and establish ourselves as a retailer that has great access to a broad array of inventory. And that's going to vary on a store by store basis.

But generally we expect very positive results as we do the things that we're doing to put these stores in a position to sell parts. And particularly in the western half of the country, where the CSK stores have really not done a great job of penetrating the retail market because of the support structure they had -- not having good access to inventory, not having the nightly replenishment and the breadth of SKUs that we have -- we would expect very good sales results from a commercial standpoint out there.

The second part of your question, as far as just a contributor to the core O'Reilly comps, what I would say is that both the traffic and transaction average were contributors to our comp store sales a little heavier on the transaction average than traffic, but both were contributors to our comp store sales growth.

And there are no further questions at this time.

Okay. Well, thanks everyone, for your time this morning. We're looking forward to, wrapping up the quarter.

The quarter so far has been strong from a comparable-store sales standpoint. We're considering the leap year loss of a day in our guidance, and also the fact that March is the largest month of the quarter, and would be weighted the most heavily in the quarter, and we've not had that, yet, but we'll look forward to reporting our results in April.

And we'll talk to you then. Thank you.

And this concludes today's conference call. You may now disconnect.