O'Reilly Automotive Inc (ORLY) 2009 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everybody to the 2009 O'Reilly Automotive first quarter earnings release conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. Mr.Tom McFall, you may begin your conference.

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

In addition, statements contained within the press release that are not historical facts are forward-looking statements. Such as statements discussing, among other things, expected growth, store development, integration 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 year ended December 31, 2008, for more details.

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

Welcome to our first 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. David O'Reilly, our Executive Chairman, is also present. I'd like to start off by thanking all of team O'Reilly for their hard work and dedication to our Company's success. Our team is fully focused on providing the best customer service in our business. And I think the great levels of service we provide continue to be evident in our comparable store sales growth.

I'd like to thank our store installation and conversion teams who have done such a great job setting up and opening our new stores and converting the CSK stores. These conversions have been a very significant undertaking, and I'm pleased with not only the pace of the conversions, but the great job our teams have done turning each of these stores into an O'Reilly Auto Parts store. Each of you have clearly exhibited our culture values, and I think all the team members that joined O'Reilly as part of the CSK acquisition have been impressed with your work ethic and dedication to getting the job done right, no matter how difficult the circumstances.

Currently, we're nearing the end of the first phase of our CSK integration process, having merged the stores that overlap with an existing O'Reilly store, and converted most of the stores that can be serviced by an O'Reilly distribution center, including the stores within reach of our Billings, Montana DC, the upper Midwest stores, the Chicago metro area, west Texas, and we're currently finishing up this phase of the conversion with the stores in New Mexico that can be serviced out of our new Lubbock distribution center. We've also completed the conversion of the Detroit distribution center, the old Murray's DC, to our computer and material handling systems, and have converted the Murray's stores supplied by that DC over to RPOS systems. Ted will be providing more detail about the new store openings, as well as more specifics on the CSK conversions in a moment.

But I want to say that we're pleased with the progress on the integration. We've made a lot of headway since July of last year, not only on the first phase of the store conversions, but also with the progress in building a stronger distribution network out west. We've purchased existing distribution facilities in Southern California, Seattle, and Denver, and we have a location under contract in Salt Lake City. These four new DCs will augment the existing capacity we have in Phoenix and Dixon, California, and allow us to fully implement the O'Reilly dual-market strategy.

We've also made significant progress with the changeover of inventory out west, which is progressing one product line at a time. And we're very confident that we'll continue to see positive results as we progress with these byline changeovers and deployment of more customized inventories that focus on a good, better, best offering. We've also integrated many of the headquarter's functions into our Springfield headquarters. And we're making incremental progress on that front.

At this point in the integration progress, and I think I speak for the whole management team when I say we're pleased with the acquisition, and excited about what the future will bring as we continue our progress through this integration process, and put ourselves in a position to significantly grow our market share in these new markets. Again, Ted will reviewing more details on all this in a moment. Sales grew nicely in the first quarter as the stronger business trends we started seeing in the latter part of 2008 continued into this year. Core O'Reilly comparable store sales grew at a strong pace and were steady throughout the quarter.

As you know, we're not comparing the same number of days in the first quarter this year to last year, since last year was a leap year. But even with the loss of a day this year , we generated very solid 8.2 comparable store sales in the core O'Reilly stores. It appears that total miles driven is making incremental improvements, but is still down a little from last year, although the data we get from the Department of Transportation is always a couple of months behind.

Considering the continued poor performance of new car and truck sales, we have to assume that the average age of vehicles continues to increase, and that miles driven on vehicles that are out of warrant and not on a lease program continues to grow. I also feel, as many of our commercial customers have expressed, that many customers are very simply back to taking very good care of their cars, with the mindset that they will be driving them for longer than they might have expected a year or two ago. And for that reason, we're not seeing as much deferred maintenance as we have in previous periods. On a by category basis, we're certainly seeing better performance in the lines that are clearly not discretionary, such as chassis and steering, starters and alternators, and batteries. While more discretionary categories like accessories and other more ancillary items aren't performing nearly as well. The strong core O'Reilly comparable store sales are very encouraging from many perspectives.

But I think most noteworthy is the fact that many of our stores are in relatively mature markets and are generating outstanding comparable store sales, as well as many of the stores in the Southeast, where we overlap with so many competitors. I think our performance in the core O'Reilly stores speaks to the depth and strength of our store operations and distribution operation teams, as so many in our management group focus their time and effort on the CSK integration. Both the core O'Reilly retail and commercial sides of the business grew at similar rates during the quarter, driven by solid ticket count increases and, to a lesser degree, average ticket price.

The CSK conversions have been moving along at a strong pace, and we're pleased with the results we've been generating. There's no question that the stores have a lot of potential as we put them back into the core auto parts business with better inventories in the stores, supported by broad distribution center inventories, market competitive pricing, and solid category management.

I'm proud of the great job our newest team members have done weathering the disruption of these conversions, training on the new systems, and beginning to build relationships with commercial customers, and provide higher levels of service to our retail customers. Many of these stores have been generating negative comparable store sales in the high single digits and even double digits prior to the conversion, and most are making the transition to positive comparable store sales within four to six weeks following the completion of the conversion.

At the end of 2008, we had 51 stores converted. Some having been converted right at the very end of the year. Of these 51 stores, we had 27 stores that had been in operation for at least four weeks post conversion at the end of the year. These stores generated comparable store sales of 4.3% for the first quarter on a calendar quarter basis. Since last year was a leap year, if we exclude the 29th of February, 2008, from the comp base to get to a 90 day comparison, they comped at 5.8%. When we look at all 51 stores converted by year end last year, many of which continued to comp negative into the first quarter, as we expected them to do, they generated comparable store sales of 2.9%, and on an equal number of days comparison, 90 to 90, comped at 4.3%.

Some things to keep in mind relative to these conversions are, most of these stores are located in the upper Midwest, which has significant sales volatility in the winter due to extreme winter. CSK did a lot of price promotions at low gross margins year around to drive traffic and generate sales on ancillary merchandise. Many of these items, such as motor bikes, accessories, car stereos, and a long list of other imported items, are not nearly as prominent in our mix.

Our plan is to put these stores back into the core auto parts business with the greatly enhanced inventory breadth, many of the key hard part or application part categories are now comping in the double digits. This type of business does not require constant promotion. It's sustainable, based on the non-discretionary nature of the products, and builds over time as we're recognized as a provider that has the parts that our customers need and are staffed by professional parts people.

It's also important to consider that we've adjusted our pricing to be market competitive, which required us to lower our selling price in the range of 2% to 4% as part of these conversions. As an example, comparing ticket counts in the 51 stores that were converted by the end of the year, we generated 7.4% more tickets in the first quarter than we did last year, which clearly indicates the additional traffic and commercial transactions we've been able to generate by not only having the parts, but by being price competitive. Again, on a 91 day to 90 day comparison, these stores generated a 2.9% comp. So we feel very good about our ability to transition these stores into auto parts destinations for the DIY business, as we work to build a solid book of commercial business in each store.

The nonconverted CSK stores generated comparable store sales of 1.5%, comparing 91 days last year to 90 days this year. We're very proud to have comped positive for the first two full quarters we've owned CSK and feel we're gaining traction as we see incremental benefit from the inventory deployments and the product line changeovers we've completed so far.

We're doing line changes and additions weekly in a very structured manner to avoid overloading the stores and the distribution centers. And at the end of the quarter, had completed almost 20% of the product line changeovers, and are on plan to complete the majority of the changes by the end of this year. There is not question that this acquisition has been a huge undertaking for our management team, and we're excited about our progress and the success we've had to date. We're on plan with the integration strategy, and have worked with each of our suppliers to deploy better category assortments and application parts coverage in each of our new markets.

Early on, we expressed our potential to generate approximately $100 million in annual run rate synergy, comprised of $25 million in operating cost savings and $75 million in merchandise cost savings. I'm very pleased to announce that we're well on our way to meeting those targets, and feel very confident in our ability to accomplish those synergies.

Looking to the second quarter and the remainder of the year, we have every reason, based on our performance over the past several months as well as current trends, to be reasonably confident that these current strong trends will continue. Yet, it's hard to ignore the high level of unemployment, and the potential that it could continue to rise. And this creates some head wind. All things considered, we're raising our comparable store sales guidance to 3% to 5% for the core O'Reilly stores for both the second quarter and the year. For the CSK stores, we're going to maintain the 1% to 3% guidance for the second quarter, and maintain our annual guidance of 2% to 4% for the year, as we believe we'll continue to gain traction as the year progresses. On a consolidated basis, we'd expect 2% to 4% comparable store sales for both the second quarter and the year.

I want to thank all of team O'Reilly for their hard work during the first quarter as we worked to gain market share in our existing markets, and worked to integrate the CSK stores and provide better levels of customer service in those markets. We're progressing well, and look forward to great things to come as we complete the inventory changeovers and establish our distribution network in the western half of the country.

I'll now turn the call over to Ted Wise, our Chief Operating Officer, to provide more details on our continued expansion and the integration of

Good morning, everyone. To start off I'd like to give a brief overview of our expansion in the core O'Reilly stores for first quarter. We actually installed 58 new O'Reilly stores, however, including the CSK-O'Reilly store mergers which resulted in some store closures, we increased our net store count by 52, bringing us to a total of 3337 stores at the end of the quarter. Fifty-eight new stores were installed throughout 17 states, with a top expansion area being in North Carolina with 13 stores, Texas with nine stores, Georgia with seven stores, and Ohio with five stores. In addition to the new stores, we relocated four stores to new prototype buildings and had extensive renovations in nine other stores.

All in all, and especially considering the massive changeover plan going on in the CSK conversion stores, this was an exceptional first quarter for our new expansion. The upcoming quarter will also be a strong one, with approximately 54 new stores on the schedule. As previously stated, our new store expansion will end up in the area of 150 new locations for 2009. Our expansion will continue to be strong in the eastern states and the Ohio valley area, supported by the new DC in Greensboro, North Carolina, which is scheduled to open in the middle of May. The new distribution center will start out servicing around 60 O'Reilly stores, with a capacity to service up to 250 stores.

The Murray, Detroit distribution center was successfully converted from the CSK system to the O'Reilly system last weekend, and will continue to serve the 79 Detroit area stores. This DC has plenty of excess capacity, and will play an important and necessary role in our continued store growth in Michigan and the Ohio area.

Service of a group of existing stores will be moved to the new Greensboro distribution center from our Atlantic DC, opening up the needed distribution capacity for our continued expansion in the southeast states. Our eastern division store group has experienced strong comp store growth. And we feel confident that with the increased market presence in the southeast states, we will continue to gain sales momentum.

We're also seeing a good sales trend developing in the northern division, and with the additional market presence of the converted Checker stores, and the improved service and inventory levels provided out of our upgraded Minneapolis, DC, we expect to see this trend continue throughout the year.

Now, to summarize our progress on our CSK conversion work, we are now in the final stretch of completing the first phase of the conversion that started last September. This included the 300 plus stores that we designated could be switched over to an O'Reilly distribution center. Next week, we'll be finishing the last group of New Mexico stores, and with last week's Detroit DC and store conversions finished, all the stores in this first phase will be replenished on a nightly basis. Most important is the increase in upgraded inventory SKU mix in the stores, competitive market pricing, and the operation on the O'Reilly point of sales system. We will still have store reset work to do in the Detroit area store, but this should be finished by mid-summer.

As an immediate follow-up to all these store inventory changeovers and layout resets, we are also in the process of interior image upgrades, that include installing the O'Reilly decor package. The exterior re-brand, including new O'Reilly signs, has also started with the Checker stores in the northern states, and is moving to the New Mexico stores. Plans are being made to re-brand the Chicago Murray stores to O'Reilly, followed by the Detroit stores later on in this year.

In regard to the changeover tasks for these 300 stores, I also want to recognize the hard work of O'Reilly team members that have been involved and responsible for planning and execution at the corporate and distribution level. The store installation supervisors that have managed the actual conversion in the field have done an absolutely outstanding job. They were supported by literally hundreds of O'Reilly team members from throughout the stores, that volunteered to help in the changeover and training of the new team members in the CSK conversion stores. No doubt, this is a great example of our O'Reilly culture, based on hard work and dedication.

Now to move on and review our plans for the balance of the CSK store base, it obviously starts with the required addition of distribution capacity. And it's great to announce that we have finished the site selection and acquisition of all four of the new distribution centers out west. The first DC is scheduled to open in Seattle in November, and will service the 216 Schuck's stores in the northwest. The southern California DC will open next January and service 230 Kragen stores. The Denver distribution center is scheduled to open in March, and service the Colorado Checker stores. And then in May, we will be opening the Salt Lake City location to supply the local area Checker stores. All of these DCs will open with O'Reilly distribution systems and service models, including expanded SKU coverage and nightly replenishment.

Then, after the DCs are opened, the current CSK distribution centers, both in Phoenix and Northern California, will be reformatted to the O'Reilly DC model, which should be completed by the end of next year. This is obviously a very aggressive rollout plan. But we have an outstanding DC leadership team developing and addressing all the pieces of a very complicated and time condensed plan. We are very confident in their ability to get the job done.

In regard to the actual store conversions, they will obviously be in conjunction with the opening of each new DC. Realizing that all stores will receive a point of sales system, there would be a huge amount of training and orientation of the team members during this process. Unlike the 300 stores we are now finishing, these stores will not have inventory lifted, since line changes are progressing in the stores now, and for the most part should be completed by the time the store changes DC computer systems. This will make the transition much easier and less disruptive for the customers and team members. We will, however, need to reset brands and do interior image upgrades to the O'Reilly brand, followed by the re-branding of the exterior to O'Reilly.

In regard to the re-branding of these stores, as announced, our co-branding plan is well underway, and should help make the actual re-branding to O'Reilly a much smoother transition. All team members are now wearing the green O'Reilly co-branded uniform shirts. All interior signage is co-branded. All our print and radio advertising has been converted to co-branded. And the stores are stocking O'Reilly branded chemicals and private label products. The feedback on our co-branding from the team members and customers is very positive.

Of course, the most effective part is not what we are saying, but what we are doing in regard to improving our store inventory levels and help support systems, while adjusting our prices to be competitive. It is a process, and obviously it takes time to establish and build market share, but the transition has started and product line by product line, we are improving the store's ability to grow their business. Of course, the addition of nightly service levels, O'Reilly systems, and a total re-branding to O'Reilly will be the final and key foundation for our growth and success in these stores.

In regard to our team member training and staffing efforts, the store operations field sales, and distribution management teams are being realigned to mirror the O'Reilly program and management concepts. Our new team members have been very receptive to this transition in the O'Reilly dual-market focus needed in the field to better manage our operations and service both our retail and installer customers. Just to make a follow-up comment on Greg's comments on the sales growth, I want to point out that during the last couple of years, we have been busy implementing several key programs at the store level throughout the Company, including a new point of sales system, a new labor scheduling tool, and a new LMS or computer based training system.

These new tools are now fully implemented and can play an important role in improving our productivity and customer service levels in all of our stores. In addition, our first call installer sales teams have never been more focused on making quality calls and building business relationships with our professional customers. The great example of this is our certified auto repair installer marketing program, which continues to gain membership and is now up to over 2300 quality repair shops. We are continuing to add over 50 new shops each month and almost half of them is coming from the new installer customers in the CSK market areas. Overall, our stores have never been better prepared and positioned to service both our retail and installer customer.

In ending, I would like to congratulate team O'Reilly on the outstanding sales achievement for the first quarter. No doubt, it is the result of lots of hard work and continued focus on giving the best customer service level in each store market. I will now turn the call over to Tom.

Thanks, Ted. Now we'll take a more in-depth look at the numbers. Sales increased $518 million, 80% over the prior year, to $1.2 billion for the quarter. The increase was attributable to a $55 million increase in O'Reilly comp store sales, $37 million in non-comp new store sales, $1million increase in non-comp store sales, and $425 million for the acquired CSK stores. For the year, we maintained our total revenue guidance of $4.7 billion to $4.8 billion.

Gross profit was 46.6% of sales for quarter versus, 46.2% in the fourth quarter of 2008. The improvement was driven primarily by buying synergies from our increased purchase volumes, offset in part by a full quarter of price corrections in the CSK stores to move to competitive pricing, and the increased amount of commercial sales at the CSK stores. We continue to be comfortable that product merchandise acquisition cost savings will be $50 million in 2009. For the year, we anticipate gross profit as a percentage of sales will be 46.8% to 47.3%.

SG&A for the quarter was 36.9% of sales, versus 39.0% in the fourth quarter of 2008. Excluding nonrecurring charges from both quarters, SG&A for the quarter was 36.7% of sales, versus 37.9% in the fourth quarter of 2008. The increased leverage was a result of better comparable store sales. continued savings from elimination of duplicate SG&A functions, and fuel savings. Offset in part by higher payroll associated with conversion and training at the converted stores. We continue to expect 2009 SG&A synergies to be $7.5 million to $12.5 million on top of the $7.5 million realized in 2008.

Net interest expense for the quarter was $12 million versus $13 million in the fourth quarter. With $2.2 million of that number representing amortization and debt issuance costs. To the extent our debt is not swap to fixed rates, lower LIBOR rates during the quarter had a positive impact on our interest expense. We expect 2009 interest expense to be $51 million to $54 million, with $9 million being noncash amortization of debt issuance costs. The tax provision for the quarter was 38.5% of pretax income. We expect full year tax provision to be 38.4% to 38.7% ,with the increase over fiscal 2008 attributable to including a full year of the CSK stores, which predominantly operate in higher tax rate states.

Excluding a noncash acquisition related charge, adjusted EPS for the quarter was $0.47 per share, which represents an increase of 17.5% over the prior year. The only remaining acquisition charge we expect to take is amortization of tradenames and trademarks recorded as part of the purchase price allocation in accordance with the Statement of Financial Accounting Standards 141. We will amortize the remaining value over the next two years as we convert all the stores to the O'Reilly brand. For the quarter, the impact of this noncash charge was $0.01. And it is expected that for the year, the impact on GAAP EPS will be a decrease of $0.03.

Moving on to the balance sheet. The core O'Reilly average per store inventory at the end of the quarter was $475,000, which is a slight decrease from the $478,000 as of last March. For the CSK stores, the average per store inventory increased from $461,000 per store at the end of December to $511,000 at the end of March. This significant increase is a result of our line conversion process swinging into high gear. The average CSK store inventory in excess of the average O'Reilly store inventory is a result of duplicate inventory in the CSK system, as a result of these extensive line changeovers. When the integration process is complete, we would expect the average CSK store inventory to be similar to the core O'Reilly levels.

Accounts payable of $761 million was 46.8% of inventory as compared to 46.7% in the prior year. The AP to inventory ratio was helped by significant line changeover orders. But the ratio will continue to be under pressure based on the existing credit markets.

Total borrowings were $791 million dollars at the end of March, which was an increase of $58 million over year end. This increase was driven by $61 million increase in the borrowings under our ABL, which had $675 million outstanding at the end of March. The increase in borrowings was expected, as we invested in additional inventory for the CSK stores and purchased three DC properties. As of March 31, we have $395 million of availability under our ABL. We maintain our projections that we will incur an additional $80 million to $120 million of debt from December 31, 2008 to December 31, 2009.

Capital expenditures were $151 million for the quarter, which was in line with our expectations. The increase of $92 million over the prior year is attributable to the three DC properties purchased during the quarter and the CapEx to convert stores. We continue to expect to spend between $420 million and $470 million on CapEx this year, and have depreciation expense between $130 million and $145 million.

Now for some other financial information. Cash flow from operating activities was $87 million for the quarter, compared to $119 million in the prior year. The $32 million decrease was driven by the investment in inventory at CSK, offset in part by higher EBITDA. Stock option expense for the quarter was $3.3 million, compared to $1.4 million in the prior year, with the increase driven by the options issued in conjunction with the CSK acquisition. For the quarter, the reserve for LIFO decreased by $3 million as prices stabilized and some base commodity prices decreased.

To re-cap our guidance, for the second quarter, our comparable store sales guidance for the CSK branded stores is 1% to 3%. For O'Reilly branded stores, 3% to 5%. And the consolidated comp guidance is 2% to 4%. This comp guidance is given based on the progression of the quarter thus far, and with consideration of the negative impact of the Easter holiday falling in the second quarter of 2009 versus the first quarter in 2008. Our GAAP EPS guidance for the second quarter is from $0.50 to $0.54 on 136.7 million shares. Excluding the noncash charge for names and marks, we expect adjusted EPS to be $0.51 to $0.55.

For the full year 2009, our comparable store sales guidance for O'Reilly branded stores is 3% to 5%. And for CSK and consolidated, the comp guidance is 2% to 4%. Our GAAP EPS for the year is $1.89 to $1.93 on 136.9 million shares, and excluding the charge for names and marks, which is the only acquisition-related charge we expect to take in 2009, we expect adjusted EPS to be $1.92 to $1.96.

At this time, I'd like to ask the operator to come back, and we'll be happy to answer your questions.

(Operator Instructions). We'll pause for a moment to compile the Q&A roster. And your first question comes from the line of Stephen Chick with Fbr.

Good morning.

Good morning.

A couple of questions maybe on the numbers if I could at first. Just to clarify. The O'Reilly branded comp of 8.2% is just for the leap year comparison, is it as simple as kind of doing a one divided by 91 type of calculation. What would that have been without the day? And if you could give me the same calculation for the CSK branded comp of 1.5% please?

In general, the numbers work like this. The extra day last year was a Sunday. So for the core O'Reilly stores in the quarter it was not -- it was not a full day's impact since the wholesale side of the business doesn't run on Sunday. For CSK it was a bigger impact because Sunday is a big retail day for them.

Okay. So what was the impact again?

So in general, it's a little less than 1/90th for the O'Reilly stores and a little more than 1/90th for the CSK stores.

All right. That's helpful. And your comps about where you're trending so far in April of the current quarter. I actually didn't get that. Are you -- your guidance, similar to last quarter, is pretty conservative relative to the quarter that you just reported. Have April trends -- I guess notwithstanding the Easter shift -- have April trends continued the trajectory, or what are you seeing so far in the quarter that we're in?

Steve, what we would say is that the trend we were on in the first quarter is basically continued into the second quarter, with the caveat being that Easter last year was in March and this year in April. And that obviously has a negative effect at this point in April. That obviously, from a comparison standpoint, has made one of the weeks so far this quarter not look as good as it would have had that not happened.

I know that it could be viewed that at 3% to 5% O'Reilly with 8.2% comps on a slightly uneven comparison could seem conservative. We continue to have the overhang of the general economy and the unemployment being what it is, and the potential for that to increase, which ultimately could have an effect on our customers, even though they're trying hard to manage their expenses the best they can and maintain their cars and so forth.

Hopefully, we do better than what we're projecting, but we feel very confident in projecting 3% to 5% for the core O'Reilly and 1% to 3% with the CSK stores that have not yet been converted.

And I think also, correct me if I'm wrong, but the later months of the quarter, are they a higher proportion of the quarter for sales. Is June the highest?

The second quarter we ramp total volume from March to June, with June being the largest month.

And your next question comes from the line of Kate McShane Citi Investment Research.

Good morning.

Just briefly talk about your view on some of the incentive programs that are being offered by the OEMs, and do you think that could slow some of the strength that you have been seeing in your business? And is that incorporated into your guidance or will this possible improvement completely be off, since dealerships are still going out of business?

Yes, well, our business has always been driven by vehicles that exist in the marketplace that are older vehicles, and vehicles that are out of warranty and so forth. There's no question that car sales have always been something that -- as new cars came on the road, they obviously didn't take as many parts as the older cars. There's such a big vehicle population in the United States and there are so many people that are finding out that there is value in the cars that have 100,000, 150,000 miles on them and so forth.

I don't see a lot of the core customers that we deal with taking advantage of the incentives because of just the cash position they're in as families, with unemployment where it's at and so forth. If something were to happen to where new car sales were to go crazy and there was a material change in the vehicle population in the US, yes, it could have short term effect. But that's not happened in our history to the degree that it affected our business materially.

Okay, that's helpful. And can you talk about the competitive environment now that you've converted more stores and converted more to the DCs. Have you seen your competition, whether it be national or regional competitors, get more aggressive in these CSK regions.

Well, we've always had great respect for all of our competitors. They've always been relatively aggressive, and there's not a market that we exist in that we don't have a good strong competitor. We've not seen a material change in the level of competition as a result of any of the efforts we've made to convert the stores. I feel like the stores had solid competition to begin with.

I do think that the things we're doing put us in a much, much better position to compete with companies that are very capable of competing with us. And we've done that throughout our business lives. And we'll continue to do that.

We think that we have good strategies to go to market and we do a good job of managing inventory and pricing and we have great teams in the field that drive our commercial business and provide great service to our retail customers. And we're going to do all we can to drive retail traffic into our stores.

But to answer you question directly, no, we've not seen a material change in competitive activity as a result of the things we've done.

Thank you very much.

Thank you.

And your next question comes from the line of Scott Stember with Sidoti.

Once again, talk about the how many DCs you will eventually be putting in place our on the West Coast, and give us a time line one more time.

The plan is that we would open the Seattle distribution center at the end of this year, and we'll open the Southern California distribution center the first of next year. Denver late spring next year. And then Salt Lake City shortly after Denver, maybe late spring, early summer. And then the Dixon, California DC that exists out there now that is supplying many of the CSK stores out west, would be converted in the end of the summer. And Phoenix which is the other DC that supplies the western CSK stores, would be converted in early fall.

And beyond that, plans to add additional DC's on the west coast.

Not right now. That gives us good solid capacity and some growth potential for some time to come. We still have a lot of work to do to evaluate our potential to expand out west. Although we do see potential and we've got capacity built into our existing distribution plan to allow for that. We don't have plans to put any other distribution centers out there right now.

And on the west coast stores, as far as layering in the commercial bids, can you talk about how that's gone. You've talked about the initial 300 stores, some of them which you've converted done very well. Have you seen anything on the west coast?

Well, our growth in the CSK stores out west has been driven a little more by the commercial business than it has the retail business thus far. And I would expect that -- the disparity and the rate of growth to continue for some time. Our commercial programs are solid. And as we put ourselves in a position to have more access to more parts and good category management, I think that we'll continue to grow our commercial business. We've done pretty well in the commercial business out there so far. And we have a long way to go.

And we're far from being the supplier that we'll end up being out there once we have all our tools in place. But we have taken advantage of the deployments of inventory in the 120 stores that we've put broader inventory in, and those inventories are strategically located to service a hub type system for stores surrounding them. We have had some good fortune in expanding our commercial programs out there.

And we don't put this in our public disclosures, but this has been asked before, as a percent of sales, CSK had previously measured their commercial business as about 18% of sales. And DIY about 82%. Based on our measurement during the fourth quarter, it was more like 13% to 87% -- I'm sorry, about 10% to 90% and currently, it's about 13% to 87%.

You next question comes from the line of Craig Kennison with Robert W. Baird.

How you doing? Did you anticipate any supply disruptions related to the Big Three troubles in the automotive sector, and what are your contingency plans?

We certainly have watched that. There's no question that many of the aftermarket suppliers are also OE suppliers. Many are very strong suppliers that have a good mix of both aftermarket and OE business. We have evaluated that. Our merchandise team has evaluated that on a by supplier basis, many of our products come from more than one supplier as it exists today. And in most cases we have backup suppliers for the suppliers we have for core products.

And if it came to that, we would be able to use backup suppliers. And we currently do that, and we have done that for years. If a supplier replaces their computer system which has happened over the past eight or 10 years as companies have moved to more enterprise-type systems, they sometimes would have glitches in shipping and so forth. And we would augment one supplier's capacity with another supplier to help ensure we're able to provide parts for our customers. The same strategy that we've used in the past would apply now with a list of backup suppliers for each of the primary categories that we carry.

Do you need to stock up on additional inventory ahead of that issue?

No. Some of the products that we carry, we order more than once a week. If we felt like a supplier was headed towards some imminent problem, we would certainly do that. We've not been put in a position to do that any more than we would with seasonal anticipation of demand, similar to what we've done in the past.

Do you have any early projection on how you and your DIFM customers would benefit from franchise dealer consolidation?

Well, the repair work that the franchise dealers are doing now in some of these smaller markets, and there's been several closings as most of you know. There's a convenience factor related to repair work that is out of warranty. And some of the carry-over that a warranty vehicle has had to a dealership is cash out of warranty business. We believe will be distributed out into the aftermarket market, simply from a convenience factor. Someone that lives in a small town may be 30 or 40 miles from a metro area that was maybe having their car worked on at a dealership when it needed maintenance.

I think those customers or many of them will transition to an aftermarket supplier, and then that business would be supplied by us and the others that compete in the aftermarket.

(Operator Instructions). Please limit you questions to one question and one follow-up. Your next question comes from the line of Tony Cristello, BB&T Capital Markets.

Good morning, gentlemen.

Good morning.

One question I had was, Greg, when you talked about the lift in the converted stores and the comp being sort of the 4% to 5% range, and if you go back to last quarter and you talked about those converted stores at the time and maybe that was the trend for that week or period running in the mid-teens, can you sort of compare or contrast -- is it a timing difference? Is it a situation where if you would have looked at the period as a whole at last quarter's data point, that total comp might have been 2% and now we're at 5%.

I'm just trying to understand in relationship what might be the difference and how we should be viewing that.

At the point we reported these stores, we didn't have many of them converted for long. And as you know, we're bringing these stores up from a negative comparable store sales performance. And many double digit negative comparable stores sales performance. So it takes a while to get them to the point that they're comping positive.

At the point that we reported fourth quarter earnings, rather than try to include the period in which the negative sales are pulling back to zero, we would just look at our weekly performance for the different sets of stores. What I reported on was the stores that had been opened in October and then November and so forth. And then talked about how they had performed their 13th week of operations, their 14th, week, and 15th week. Those stores were on a strong trend.

Most of those stores were in the upper Midwest. Sometimes in the winter time you can have periods of real high demand during ideal weather conditions, and periods of low demand during worse weather conditions.

Since then -- and I think your comment would probably be pretty close on the 2% range if we looked at all the stores at that time, including those that had just opened that were still running negative, that might have been pretty close. We now have a larger conversion base and what they generated on -- for the 51 stores, if you compare 90 days to 90 days. And these would be the stores that had been converted at the end of the year, they generated 4.3% and then the 27 stores that had been opened four weeks at the end of the year generated 5.8%. That's currently the run rate that we're on.

Now, especially in the upper Midwest as we get into spring, those stores will continue to ramp. And I brought up some points that we have to consider relative to the price deflation that we've done ourselves, and knew that that would have some effect and some other things that have an effect on a short period of time view of comparable store sales.

This is Tom. When we we look at the stores on a month that they converted and we look at them in buckets like that. They start our negative as we have training issuings. And sequentially, each month's class of store conversions has done better month after month. So we keep adding stores to the converted bucket. But we haven't seen what the ultimate comp is for the converted stores because they continue to do better month after month.

Okay, okay.

So we're not to the run rate yet.

okay. I've got you. And if you look at them as a follow-up, as you -- are the trends in the stores you have yet to convert as bad on a year-over-year basis as what you've converted today? Were they running as negative or worse? Or was the Midwest a worse group or the California stores a worse group from a year-over-year comparison in terms of conversion?

Well, the types of conversion that we're completing right now, we're almost done with the full store conversions. From this point forward, excluding the stores supplied out of Detroit, we'll change the out front, the display merchandise and the layout. But they will be one product line at a time. Some of the upper midwest stores weren't their best performing stores. No doubt about it. The California stores performed better.

The deep southwest stores are currently not performing as well as we would like because of the border disruption and the various things going on with people coming in from Mexico and the devaluation of the peso and things like that.

I would say that the stores in the upper Midwest weren't their best performers. We converted the Chicago stores and we have yet to have enough time to really get a measurement of how those will do. Those were Murray stores and we feel good about the amount of business we'll be able to capture over time in Chicago as we implement our commercial programs.

Your next question comes from the line of Brian Sponheimer with Gabelli.

Good morning. I was hoping we could drill down on the 8.2% comps for your O'Reilly branded stores. I apologize if I missed it. Could you quantify how much that Easter timing impact had on the comps. Secondly, I'm curious if you have any idea how much of that comp was from actual deferral of maintenance that took place during the third and fourth quarters.

The Easter being in the second quarter this year was definitely a contributor to the comp. But the detraction, and probably a mitigating factor is that we were comparing 91 days last year to 90 days this year. We don't have a quantification for what the effect of that would be.

The number was so outstanding, I was trying to figure out what took place in the way of consumer spend or consumer behavior that would push that 8.2 number.

I this what it is -- and this started late last year. We have consistently seen stronger comparable store sales as I think consumers have really having been through a period of a couple of years of high gas prices, deferring everything they can, having been in this mode, many of them -- we trade cars every three to five years. And realize that, one, not a lot of the domestic manufacturers are offering lease vehicles any more. They may have to buy or keep a vehicle.

Two, they may be keeping whatever they're driving for a longer period of time. And they want to maintain it better to keep it on the road. And I think that what lot of consumers are realizing is that these cars with higher mileages are high quality cars when they were built from a drive train and a body and an interior perspective. And they can be driven at higher mileages.

What we've seen the very steady and relatively robust business since the end of last year. We've not had any dips in demand for any extended period of time. Since the end of last year. And it's impossible for us to measure how much is catchup on deferred as opposed to business as usual.

The comments we get from our commercial customers is that there appears to be not as many customers that are deferring major repairs that need to be done to fix the car right and make it road worthy.

Thank you very much. That's very help.

And your next question coming from the line of Jack Murphy with William Blair.

I want to follow-up on an earlier question. On those 15 or 24 stores that were converted first, could you talk about how those are now performing on weekly comp terms?

Well, I don't have that. Do you have that, Tom?

The comps are as I mentioned on an earlier question, the comps continue to improve. So they're above where the averages, having started the year and gained traction throughout the quarter. We don't comment typically on weekly comps. Because they can be up and down. But the stores continue to perform better. You can think about that, the numbers we gave as the average for the quarter. So we've progressed from there.

Let me just to be clear in terms of the 15% to 17% range you talked about last time, it's exceeding that in the most recent weeks?

We look at it in different layers of stores. We didn't come prepared to disclose the weekly comps of the different segments of the stores as they've been converted. And the only reason we did it last quarter was because we had such a short period of time between the time the stores were converted and the time we reported. We decided that was probably the most indicative way to indicate the trend that those stores were on. And we just don't have those numbers with us now and aren't prepared to disclose those.

Fair enough. Less specific way of asking. What your expectation is for sort of first year comps after conversion.

That's yet to be seen to a large degree. Our experience so far has been once we pull the stores out of the negative comp range and get them comping positive, they'll comp well. I would say that we would expect mid-single digit comps for sure and beyond that.

Again, we're trying to be relatively conservative on what we set for expectations in these stores. Because a lot of it is yet to be seen. We know these stores have strayed greatly from being core auto parts supply stores, and we're putting them back in that business. Many of the categories that we have put them into, hard parts categories are really the basis of our business, those categories in the conversion stores are comping double digits today.

We've sacrificed some of the business they were previously doing in more ancillary items by intent. We think the stores will do well as we do these conversions. A reasonable and somewhat conservative approach to conversion stores would be that we would expect them to comp in the healthy mid-single digits for the first year. Hopefully beyond that, but I don't want to get too far ahead of ourselves in what the expectations are without having some more experience under our belt.

Because those stores were up north, we're just now gets the signs changed out on the exterior and the interior remodels are being finalized and the advertising started to kick in on the O'Reilly flier program and radio print. We're certainly optimistic. Plus it's spring in the northern states. We're optimistic that they're going to do well.

and your next question comes from the line of Matt Fassler with Goldman Sachs.

Hi, Matt.

Hi. Just a couple of quick follow-up questions. As you think about the competitive environment, is it your sense that independent jobbers that you compete against is more pressured at this point, might that be contributing to your comps? Would you say that the market in general is doing quite well right now.

I think that if there's any pressure in the industry from a retailer perspective, the independent jobbers are the ones that are feeling most of that pressure. I think as some of the pure retailers come into the commercial side of the business, that there's low hanging fruit that the independent jobbers may have had some of that business. And I think that there is some price pressure put on those guys because of the three step distribution model that they have.

They can't discount as much as some of the other companies can. And they feel more pressure than others. I think I would agree with your comment. And the independent jobbers are feeling more pressure than anyone else right now.

Just to try to get some clarity. I guess you discussed the terms of the progress that you're making at CSK which seems to be terrific in general. In two different frameworks, one was in week X at the time of subsequent to conversion at the time of the fourth quarter call. And then somewhat differently in this call. Is it safe to say essentially that you continue to make progress. In other words that the stores that you converted in the fourth quarter are tracking better than the stores you converted over the course of the first quarter. We should sort of forget about the double digit numbers we heard on the last call, think about the numbers that you gave us today as building blocks?

That's absolutely correct. And again, the way we reported at the end of the fourth quarter was simply due to the lack of time that had elapsed between time we converted the stores and the time we reported. The more appropriate way to report these is on a quarterly basis. Your comment relative to the earliest conversion stores ramping better and generally higher comps than the stores that are most recently converted. That's absolutely right, and that's exactly what we're seeing in the stores we've converted.

and your next question comes from the line of Alan Rifkin with Banc of America.

For the nonconverted CSK stores where you've simply changed the product lines. And I think you said 20% of the product lines have been changed. How are the comps for those product lines trending?

The hard parts categories that we've converted, they've trended very well. And again, it's all over the board. We e have taken those stores, as we did the converted stores, we're incrementally taking them out of some of the products that CSK had focused on over the last few years of their existence. And primarily being non-core automotive, import type items such motor bikes and various pneumatic nailers and stuff like that that really aren't auto parts type items. So we're trading those sales for good hard parts sales that we feel like are more sustainable and that we can build on. Some of the hard parts categories wqe've changed over have comped well for the quarter. And we would expect that business to continue to build which is our strategy and plan.

Okay. And what is the methodology behind which specific product lines have changed over, given that it's one at a time. What's the basis for deciding what the next change will be?

One is just the preparedness of the supplier to be ready to change the products over. You have to have the product to performance the changeover. And our focus is to try to get the stores in the best consumer position they can be in to compete with the retail competitors and the wholesale competitors. And so getting our private label price type brands in, so we have a good, better best offering and compete with our competitors out there on entry level price was important.

And that took a little longer than we would have liked actually. But we've got that completed for the most part now. And the reason it took some time is that those suppliers just weren't in a position that they could immediately fill the orders for that many stores. But we now have completed, and now we're laying the ground work with some of our branded offerings to put us in a better position to compete on the commercial side, having recently changed our chassis and steering product line and our brake product line.

And there are no further questions at this time. I would like to turn the call back over to Greg. Greg, please go ahead.

Thanks, everyone, for your time this morning. We're excited about the business, excited about the way the conversions are going, and about the acquisition in general. And we'll look forward to reporting our second quarter performance later on in the summer. Thanks, everyone.

Thank you everyone. And this does conclude today's conference call. You may now disconnect.