O'Reilly Automotive Inc (ORLY) 2011 Q4 法說會逐字稿

Good morning. My name is Silvia, and I will be your conference operator today. At this time I would like to welcome everyone to the O'Reilly's 2011 fourth-quarter and full-year earnings release conference call. (Operator Instructions). Thank you. I will now turn the call over to Mr. Tom McFall. Sir, you may begin your conference.

Thank you, Silvia. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have 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. You can identify these statements by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words.

In addition, statements contained within this press release that are not historical facts are forward-looking statements such as statements discussing among other things expected growth, store development, integration and expansion strategy, business strategies, future revenue and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and 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 regulations; the Company's increased debt levels; credit ratings on the Company's public debt; the Company's ability to higher and train qualified employees; risks associated with the performance of acquired businesses such as CSK, 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 annual report on Form 10-K for the ended December 31, 2010, for additional factors that could materially affect the Company's financial performance. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

At this time I would like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly auto-parts 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. David O'Reilly, our Executive Chairman, is also present.

It is my pleasure to once again congratulate Team O'Reilly on the solid quarterly performance and the outstanding results in 2011. The 4.6% same-store sales increase we achieved for the year on top of the 8.8% increase we generated in 2010 was a significant accomplishment, and we should all be very proud of our performance.

The main focus at our annual store managers conference in Nashville a couple of weeks ago was several initiatives currently underway that will put us in a position to take the great customer service our stores currently provide to the next level. These initiatives are progressing nicely. However, more important than any of the tools we use is our commitment to ensuring customer service is our top priority. No matter what role we play in the company from receiving, stocking, picking and shipping products at our distribution centers to providing expert advice to our walk-in customers, to prompt accurate parts deliveries to our professional customers, we all play a critical role in making sure the level of service we are able to provide our customers exceeds that of our competitors, and all of Team O'Reilly is to be congratulated on the excellent job you did delivering industry-leading customer service in 2011.

Now onto some details about our Company's performance in the fourth quarter. As we discussed on our third-quarter conference call, we forecasted fourth-quarter comparable store sales in the range of 3% to 5%. We generated comp store sales in the lower end of our range at 3.3% for the quarter. As many of you that have followed our Company and industry over the years know, the fourth quarter is always the toughest quarter to forecast comparable store sales.

A couple of factors play into the volatility of comps in the fourth quarter. The first is weather. It plays a key role in driving seasonal demand. As we said before, extreme temperatures, hot or cold, generally generate better demand in our business than mild conditions. This winter most of our markets have had unusually mild weather up to this point.

The other factor is simply economic conditions. As financially stressed consumers took on the extra burden of discretionary holiday spending, we speculate that many deferred expenditures that could be deferred, including vehicle maintenance to some degree. That said, with the comparison against the 9.2% comps we had in the fourth quarter of 2010, we are reasonably pleased with our results.

As has been the case for some time now, our comparable store sales growth is being driven primarily by the professional side of our business. Both in the CSK converted stores and the historical O'Reilly markets, the do-it-for-me side of our business is growing faster than the DIY. We speculate this is primarily a symptom of the economy, whereas the typical do-it-for-me customer may not be as financially challenged as the typical DIY customer who primarily does their own vehicle maintenance out of economic necessity.

We continue to make good progress at implementing our business model in the stores acquired with the acquisition of CSK. We are gaining credibility with professional customers in these markets and expect these stores to continue to generate strong sales improvements over the next several years as our teams develop their skills and become a credible business partner for the professional customers.

We are also working to gain back the retail business that had been lost in the Western markets prior to the acquisition. I will not go into a lot of strategy discussion on this topic, but will say we are currently putting a lot of effort on regaining the DIY traffic that was sacrificed under CSK management and rebuilding an appropriate market share.

The CSK stores as a group continue to lead our Company in comparable store sales gains, and our expectation is that 2012 will be another strong year for these stores as our efforts in these markets continue to gain traction.

The macroeconomic factors that affect our industry remain basically unchanged since our last conference call. Fuel prices remain relatively high at $3.44 per gallon, up 11% from a year ago. Unemployment rates are still over 8%, and miles driven in the US through November were down 1.4%, representing 38.3 billion fewer miles driven. These conditions in and of themselves would typically create an overall headwind for our industry.

However, with the average age of vehicles having increased substantially over the past few years due to depressed new car sales, we speculate that miles driven on vehicles out of warranty has incrementally grown, resulting in a better auto parts sales yield per mile driven.

We also speculate that many consumers are relatively pleased with the way their vehicles are performing at higher mileages due to the significant engineering and manufacturing improvements in vehicles manufactured over the past 10 years. For this reason we suspect there will be a lasting result from this recession when it comes to the frequency in which many consumers feel compelled to replace their vehicles and the length of time vehicles stay on the road.

Our expectation of 2012 is that our industry is in for another solid year, and we anticipate our comparable store sales will be in the 3% to 6% range. So far we are off to a good start to the year with solid results for the month of January and are forecasting comparable store sales for the first quarter in the range of 4% to 6%.

Generally speaking 2011 was an outstanding year for our Company. We achieved many goals, including the completion of the work necessary to convert the CSK stores and establishing the O'Reilly brand nationally, along with several other significant financial performance accomplishments.

First, we generated a very respectable 4.6% comparable store sales gain at an all-time record gross margin rate of 49%. We opened 170 new stores, while reducing our total inventory by $38 million. We sought and established credit ratings from the rating agencies at an investment grade level and have since been upgraded by Standard & Poor's. This enabled us to replace the asset-backed loan facility we used to acquire CSK with unsecured notes. This opened the door for us to greatly enhance our vendor financing program, drive down our supply chain costs, and with the help of our supplier partners, increase our AP to inventory ratio from 44.3% at the beginning of the year to 64.4% at year-end.

These factors, along with good expense control, generated an all-time record annual operating margin on an adjusted basis of 14.9% of sales and an all-time record free cash flow of $791 million.

We are clearly very proud of our performance, but we are not spending much time celebrating our 2011 successes. We have a lot of work to do to get the stores acquired as part of the CSK acquisition performing where we want them to be and are very focused on executing our business plan in all stores.

We are also focused on improvements we feel we can make to the already high levels of service we provide our customers. On the DIY side, customers come to us for solutions to issues they are having with their vehicles. Our ability to help our customers find resolution to the problems they are having is a key driver to earning DIY business, and we are working to enhance information systems that we use to assist our parts specialists in reviewing the symptoms that a customer's vehicle may be showing and ultimately helping them come to a successful resolution.

We have several initiatives underway that revolve around other point of sale system enhancements, as well as improvements to our electronic parts catalog. As we speak, 35 of our stores are testing a greatly enhanced parts lookup platform that we feel give our parts specialists an industry-leading access to rich product content that will help us take the customer service we offer in our stores to the next level.

In closing, I think it goes without saying that we remain very optimistic about the future of our Company. As the economy improves and commuter miles increase, we expect miles driven to start increasing once again, and this should continue to drive solid demand in our industry.

We see continued opportunity for us to gain market share on the do-it-for-me side of our business, while at the same time working to drive more retail traffic into our stores, and we remain very focused on several initiatives that will help us accomplish our market share goals.

All levels of management play a key role on our results, and we are very fortunate to be in a position to benefit from the promote from within philosophy our Company has employed over the years and are very proud of the experienced management team we have in place.

Lastly, I would like to again congratulate all of Team O'Reilly on the outstanding 2011 results. I know we are all working hard to make sure 2012 is another record year for our Company. Thanks to all of you for your commitment to our continued success.

I will now turn the call over to Ted Wise.

Thanks, Greg, and good morning, everyone. Like Greg, I would like to commend our team for a good fourth quarter, as well as a great performance in 2011. It was truly a team effort from all corporate departments, our 23 distribution centers, and our sales and store operations teams. By providing great customer service, our teams produced at 4.6% comp sales for the year, which was on top of a strong 8.8% comp in 2010.

In addition, our fourth-quarter sales produced an operating margin of 14.7% and for the year set a record high of 14.9% operating margin. This demonstrates the team's ability and focus on expanding our market share based on profitable sales, while improving team productivity and being prudent expense managers throughout the organization.

We finished this year with 3740 stores that produced a 7% sales increase, reaching a record $5.8 billion total sales. Again, thanks to our team for the commitment and hard work which was required to make our fourth quarter and 2011 another record success.

Now I want to briefly cover some store expansion details. We installed a net 32 new stores in the fourth quarter, and we finished the year with a total of 170 net new stores, bringing us to 3740 stores.

Our store installation group also completed 405 CSK out-front store resets last year. With the CSK Interior resets completed and all the store exterior signs changed to the O'Reilly brand, we are entering into a 2012 with a fresh new O'Reilly image on the West Coast. Changing over to 1300 plus CSK stores to O'Reilly interior and exterior has proven to be a huge challenge, and we thank all the team members for the hard work involved in the many phases of the tasks throughout the last three years.

We added our first store in West Virginia, which puts us operating in 39 states. Michigan and North Carolina lead in new store count at 15 each followed by Texas, Ohio and Illinois at 13, 12 and 11 respectively. In all, we had store growth in 26 different states. West Coast expansion accounted for 12 of the new store installations for 2011.

This year we are projecting 180 new store installations. We started out strong with 37 new stores opened in the month of January and a projection of up to 70 stores in the first quarter. This will be a busy year for store relocations as well as we have continued to develop our relocation plans for the West Coast stores. Last year we relocated 19 stores into new buildings, and our goal for 2012 will be in the range of 40 store relocations companywide.

As leases expire, we see lots of opportunities going forward to improve both our retail image and our occupancy expense in many West coast and upper Midwest stores from the CSK acquisition. This also includes our ongoing program of upgrades and relocations in core O'Reilly stores as the need and opportunity arises to improve our position in the market.

As I mentioned, we have made great progress on all fronts with the CSK store conversions, including O'Reilly exterior signage, new planograms and reset front floors with new decor packages. From a brand and image standpoint, we are truly starting 2012 as O'Reilly Auto Parts on the West Coast.

Our teams are well trained on O'Reilly systems and converted to all aspects of our dual market foremat of growing both our retail and professional business.

Of course, the teams will continue to grow and become stronger with more experience and ongoing training. Our focus on strategic recruiting, store training and developing our teams in the stores continue to be a top priority.

In the expansion markets, our district managers, regional managers and our professional sales teams have become more seasoned and experienced, and now with the transition task of store conversions behind them, they are totally focused on building stronger store teams and the full-time sales team that will ensure we are successful in developing the relationships and providing the consistent high service levels necessary to expand our market share on the professional side of the business.

On the retail front, dual branding has ended, and all markets have converted to O'Reilly brand, advertising and marketing. This allows us to move to a national advertising platform that is much more effective and more efficient in reaching our customers across all markets.

This year's advertising plan includes the introduction of television along with our print, a strong radio advertising schedule, and the continued involvement in sports and motor sports sponsorships. We feel the addition of television into our advertising and marketing plan, along with moving to a national level program, will be a great benefit in continuing to grow the O'Reilly brand across all markets.

In addition, on the retail side of our business, raising the bar on customer service-level will be a top priority this year. One new program we will be establishing is a customer service index program for the stores that will provide feedback from our customers to our store teams. The effective integration of a customer feedback program will help our managers and our field leadership provide more consistent and higher service levels across the store group.

In addition, we are continuing to work on enhancing our store scheduling model to provide the right level of service at the right time. It continues to be a key focus of our operations teams. We will especially be focused on improving our bilingual staffing for our Hispanic customers, as well as an increase in advertising and marketing to the Hispanic market.

We know that we have good opportunity to grow our retail sales and that we must always focus on our top store goal, providing the best service levels in all of our markets. These new programs, along with others, will help ensure that our teams stay focused on achieving this goal.

As I had mentioned in the beginning, we are very proud of our Company performance last year and our team which was responsible for these great results. We definitely have opportunities to grow and expand both our retail and professional market share in our existing stores, as well as continued expansion into new markets. And, most importantly, we have a great group of motivated team members that will help us accomplish our sales and profit goals. We are looking forward to having a great 2012.

I will now turn it over to Tom.

Thanks, Ted. Now I will take a closer look at our results and add some color to our guidance for 2012.

Comparable store sales for the quarter increased 3.3% on top of the prior year's comps of 9.2% with professional sales driving the majority of the increase, although DIY comps did contribute. Average ticket increase accounted for the comparable store increase as DIY traffic continued to be under pressure during the quarter based on difficult comparisons and macroeconomic factors, combined with unseasonably mild weather in many of our markets.

For the quarter sales increased to $81 million, comprised of a $43 million increase in comp store sales, a $38 million increase in non-comp store sales, a $2 million increase in non-comp non-store sales, and a $2 million decrease from closed stores.

For the year sales increased 7% to $5.8 billion, primarily driven by our 4.6% comparable store sales growth. For the year ticket average drove the increases. DIY ticket count was under pressure for much of the year. We believe the increase in ticket average was the result of professional sales growing faster than DIY sales and our product mix tending towards hard parts, both of which carry a higher ticket average.

Our sales guidance for 2012 is $6.15 billion to $6.25 billion. Our comparable store sales guidance is 3% to 6%, driven by strong growth in the professional side of that business, especially in the acquired markets and slower growth in the DIY side of the business.

Gross profit for the quarter increased 135 basis points over the prior year. This significant increase was the result of improved distribution efficiencies and improved shrink, but the main driver was merchandise margin related primarily to more favorable gross margin on promotional items as compared to last year, as well as softer sales on some lower margin seasonal items.

For 2012 we expect gross profit as a percent of sales to be 48.9% to 49.3% of sales versus 49.0% in 2011. For 2011 professional sales comprised 41% of total sales, and we expect that mix to continue to grow as professional sales increase faster than DIY sales, which will put downward pressure on our gross profit as a percent of sales. We expect this pressure to be offset by improved distribution efficiencies, improved product acquisition costs, price optimization strategies and a somewhat more conservative advertising price strategy. When we look at our advertising strategy for 2012, we intend to be more promotional than we were in the fourth quarter of 2011, but slightly more conservative on a full-year basis. This more consistent advertising philosophy will drive a more even gross margin percentage throughout the year.

SG&A adjusted for the former CSK ops or clawback for the quarter was 35.3% of sales versus 36.1% in the prior year. The improvement was driven by improved leverage on fixed store occupancy costs and by improved payroll efficiencies, which were driven by tight operational management, leveraging sales growth and comparing against 2010, which included conversion labor. When we look at average SG&A per store for 2011, we were able to keep the expense flat per store versus an increase of 3% in the average store sales volume.

Looking forward to 2012, we expect to see per store SG&A increase between 1.5% and 2% as we return to a more normal SG&A growth rate based on not having the comparative benefit of conversion costs in the prior year. However, we expect to continue to get good leverage on per store SG&A versus average store sales volume increases as we leverage store occupancy costs in the acquired CSK stores and at the headquarters.

Adjusted operating margin for the quarter was 14.7% of sales, representing a 214 basis point improvement over the prior year as we saw strong gross margins combined with good expense control. For the year we recorded adjusted operating margin of 14.9%.

Our operating margin guidance for 2012 is 15% to 15.5% of sales versus 14.9% in 2011. The improvement is expected to come from leverage on SG&A. As a reminder, our stated goal after the CSK acquisition had been to achieve a 15% operating margin by 2013, and we now expect to achieve that goal a year early.

For the fourth quarter and the full year, the tax rate was 37.8% of pretax income, which was better than we had expected based on our ability to qualify for certain job credits. For 2012 the continuation of these job credit programs is largely uncertain. As a result, we are expecting to return to our normal tax rate of approximately 38.4% of pretax income. Adjusted diluted earnings per share for the fourth quarter, which excludes the former CSK ops or clawback, was $0.93 per share, which represents an increase of 35% over 2010. For the year adjusted EPS was $3.81 per share, which represents an increase of 25% over the prior year.

At the end of the fourth quarter, our adjusted debt to adjusted EBITDA was 1.75 times, which remains well below our long-term targeted leverage range of 2 to 2.25 times. While we have incrementally increased our leverage over time, we remain very committed to maintaining our investment grade ratings or improving our ratings as S&P did January of this year.

Moving to the balance sheet, we continue to make great progress in improving the productivity of our inventory net of payables. For the year our inventory turnover net of payables was 3.4 times versus 2.5 times last year. The improvement was driven from both the Accounts Payable and the inventory sides of the equation.

On the AP side, we increased our AP to inventory ratio to 64% at the end of the year versus 44% the prior year. We continue to see additional opportunities to improve this ratio with our enhanced vendor financing program, and we expect to finish up 2012 in the 70% to 75% range.

On the inventory front, we reduced the average inventory per store by 6% from the end of last year. Another way to look at this is, during 2011 we opened 170 net new stores and at the same time decreased inventory $38 million.

In 2012 we project inventory per store to be relatively flat as we continue to ring excess inventory out of the system and redeploy the dollars into more productive inventory.

For the year free cash flow improved 134% to $791 million. This strong improvement was driven by increased net income, the improvement in net inventory investment and reduced capital expenditures relating primarily to no new DCs in 2011. In 2012, with CapEx relatively flat and the projected additional improvements in our net inventory investment, we anticipate generating free cash flow of $600 million to $650 million.

With free cash flow this year of $791 million and the net proceeds from additional borrowings of $439 million, we are able to aggressively and opportunistically execute our share buyback program. During the fourth quarter and through the date of this earnings release, we repurchased 1.9 million shares with an average price of $75.84. This brings our repurchase to date to 16 million shares with an average price of $61.63. In 2012 we intend to continue to prudently execute our program with $362 million of cash on the balance sheet and an additional free cash flow generated during the year.

Our guidance for both the first quarter and the full year takes into account the shares repurchased through yesterday, but does not reflect the impact of any potential future share repurchases. For the first quarter, our diluted earnings per share guidance is $0.99 to $1.03. For the full year, our diluted EPS guidance is $4.27 to $4.37 per share.

At this time I would like to ask Silvia, the operator, to return to the line, and we will be happy to answer your questions.

(Operator Instructions). Michael Lasser, UBS.

I wanted to dig a little bit deeper into the comp. Have you been able to tease out what you think the weather impact was perhaps looking either at discretionary sales versus hard parts or for by region?

Well, I mean, of course, we look at all of our sales by category, and we do see some decline in what we would consider to be seasonal items of anti-freeze, fluids, some hard parts, but not as noticeably in hard parts as we do more commodity type items. But we are not planning to quantify that on the call.

Okay. But that definitely had some impact during the quarter?

Yes. And another contributor would have been some other seasonal items that would be cold weather type items, at least the demand would be driven by cold weather, and then also just kind of a promotional comparison. We had some pretty heavy promotions during the fourth quarter last year that drove substantial demand, and we did not have equivalent promotions during the fourth quarter of this year driving that same demand, and there was a disparity between the promotional revenue that accounts for some of what we would consider to be the difference.

Okay. And then the second question is on the gross margin. There was a pretty noticeable change in trend. So would you attribute that to price optimization starting to kick in? Would you attribute that to a meaningful change in shrink as you trued up some of the accounts at the end of the year? How should we think about that?

Well, I would think of it as some benefit on the margin percentage, of course, from just the seasonal mix, maybe the slower movement of some of the lower gross margin seasonal items. While you did not benefit from the revenue of sales you did not make, of course, the percentage of gross margin increased as a result of some of those not being mixed in.

The difference in promotions was a pretty significant driver of gross margin. Price optimization or just our work to manage price, of course, is always a factor. But I would say that our pricing strategy has certainly not changed. We just have a team that works very hard on managing our pricing every day, and they continue to do a good job. And then, of course, favorable distribution costs that we worked hard to achieve and then you have more favorable shrink as we continue to put in place the better accounting processes in the stores and just the store procedures that our stores have benefited from for years that the CSK stores did not have in place and are now fully implemented in the stores.

That is very helpful. Thanks a lot and good luck with the rest of the year.

Colin McGranahan, Bernstein.

Just focusing back on sales for a minute and maybe a bigger picture question. I understand there was always a lot of variability when you look at the fourth quarter around weather and demand on discretionary spending. But you look at miles driven and it has been down even as the economy has started to get a little bit better, and it looks like it is going to be down probably through December and January based on gasoline shipments.

With the new car czar pop, I guess just to touch over [14 million] in January, how are you thinking about just DIY demand going forward? You know, the interplay between maybe a better economy versus a lot less tailwind maybe from the aging of the car fleet and miles driven remaining pretty weak?

I think the way we would look at it is the DIY business will be under some pressure as compared to the do-it-for-me business for some time, specifically related to the economy. There is a -- our feeling is that those customers are just under more pressure than the typical do-it-for-me customer who makes the decision to have their car worked on in many cases because they are in a position financially that they can.

So we would think that that side of the business will not do as well as the do-it-for-me side of the business, and we will see the DIY incrementally improve as the economy improves and would suspect that there could be some catch-up in deferred DIY maintenance that occurred as some deferral for holiday spending and things like that. And that may be part of what we have seen so far in January with the stronger comps that we have had in January.

Okay. Fair enough. And then second question just in terms of the comp obviously in the fourth quarter was a little bit softer than we expected, and I understand all the drivers of that. But how do you think it did from a share perspective, a competitive market share perspective?

Well, we think we did okay. You never know how your competitors are actually doing until they report. There has not been a significant change in the marketplace that would make us think we have not continued to gain share as we incrementally have done, but we will know more as our competitors report and as we continue to progress through the year.

Anything from the MPD data that you get to see?

Well, we, of course, receive that. It appears as though we are gaining market share there. That data is in the process of going away. So this past month will be the last month that there is any of that data to be reviewed.

Brian Sponheimer, Gabelli.

A very good job, despite some weather headwinds here. I just want to talk to you, you broke out that -- you thought you saw some declines in consumer discretionary spending because of the holidays. Does this have any change or does this change materially from the prior year?

Well, as we have said before, fourth quarter is always a volatile quarter, and it is tough to forecast what is going to happen in the fourth quarter with holiday spending and so forth.

To be frank, last year we were a little surprised at the strength that had been exhibited in the third quarter carried as strong as it did into fourth quarter considering the holiday. But we were, of course, pleased with the 9.2% comp we generated in the fourth quarter last year.

So yes, I mean this year, with the tough comparisons throughout the year, we have had more single year pressure on comps. Of course, the two-year stack has looked good. But yes, I think we felt a little more this year that there was more pressure on consumers, and we base that on not only what they say to us when they are in our stores, pricing parts and considering buying parts to make repairs, but also what our do-it-for-me customers tell us customers are saying to them about jobs they are bidding and possibly deferring what they can until after the holidays and things like that.

Okay, that is helpful. Just switching over to share repo, obviously a major cap shrink in 2011 and some room for more in 2012. What metrics should we be thinking about as far as you either becoming more aggressive or tailing off from a share repurchase standpoint obviously looking at only 100,000 repurchased thus far this year?

Tom, would you like to take that?

We will continue to use our cash on hand in any additional borrowings and our free cash flow to repurchase shares opportunistically over the year with the caveat that, if a good acquisition opportunity comes up, that is a higher priority for our cash.

Okay. And then just one last one. If I'm thinking about the weather being somewhat troublesome for sales in the fourth quarter, shouldn't there also be a net benefit to working capital for the first quarter? Just in maybe you not being able -- not having to replace inventory whether it is fluids or batteries, things of that nature?

Well, the faster that we sell product and turn our inventories, the better positioned we would be in from a working capital standpoint. So to the extent that sales improve and the pace of sales improves during the quarter, that would be a positive.

I'm just talking about re-stocking.

That is what I'm talking about.

Chris Horvers, JPMorgan.

On the promotional side, less promotions year over year was a lift in Q3, and then that seemed to step up here in Q4. So could you talk about how much of this is the environment, is less promotional year over year, which would seem surprising given the level of comps last year versus this year, and how much is O'Reilly execution?

Every year you set a marketing, advertising and promotion plan. Our plan last year was not to have as heavy of promotions in the fourth quarter as what we did in 2010. And the primary reason for that is that the work we do to analyze the effectiveness of our promotions indicated that the market basket yield of the promotions that we ran near Christmas just did not generate the return that we would like to see, and for that reason we decided not to run as aggressive a promotions in the fourth quarter as what we had previously and we did in fourth quarter of 2010.

Many times when -- all of our competitors and us run hot specials on oil changes and different things, and what we see in many cases is there is not a lot of loyalty in where a DIY customer buys those items. Although you can convert a customer into being your customer the next time they need a part, assuming a good experience when they come in. But what you hope is, when they come in to buy an oil change at a great price that we may not make money on, that they buy something else that they are needing. That they are not just changing their oil, that they are at the same time changing their air filter or whatever the case may be.

We saw last lift in promotional events that were in a period when consumers were from our perception under more pressure and for that reason are trying to invest our promotion dollars in periods when we think we will reap more benefit.

I got you. So when the fish are not biting, don't go out and fish.

So then as we segue that to 2012, so does that mean that given the -- how does the gross margin -- how does the promotional aspect play out in gross margin over there? Is it something that, as you look at next year, it kind of flattens out year to year, but in the early part of the year, you will continue to get a lift out of less promotion year to year?

Yes. We have a -- our promotional plan is kind of modifying again this year, and I'm not going to speak to specifics just because I don't want to tell our competitors exactly what we are planning to do from a promotion standpoint because I know they are working on their own promotional strategy. But this year you will see more of a leveling in our gross margin as we have our promotions don't maybe last quite as long as what they have in the past. And so yes, the range we gave for gross margin of 48.9% to 49.3% should be pretty consistently applied throughout the year.

This is Tom. So to answer your question, we would expect to see gross margin improvements in the first and second quarter pretty flat in the third and then probably down in fourth.

And one more follow-up, which is on the weather, obviously December 2010 was pretty favorable given how cold it was and then obviously not very good this year.

In terms of what you are seeing in January, does that -- is that the inverse as you think about January? January was not a great month given all the snowstorms in a lot of parts of the country, and then this year maybe milder weather ends up being more beneficial?

Well, January has not been a real cold winter month for us in most markets, yet business has been pretty good. So part of that, as I said earlier, might be just some benefit that we are getting from some holiday deferral of maintenance and repairs that really needed to be done in December, but were pushed into January or something. It is always hard to know. Weather is going to be the weather. Extremely cold weather is usually good for us from a short-term spike perspective as is really hot weather. January has not been that cold of a month in most markets, but business is good.

Alan Rifkin, Barclays Capital.

Congratulations on a nice year, gentlemen. Just to follow up on the gross margin line, you said that part of the gain came from improved distribution efficiencies. I was wondering if you can maybe compare the efficiencies that you saw in Q4 versus sequentially in Q3? In other words, are you seeing greater efficiency gains on the DC side, and what is the opportunity for that to sustain itself in 2012?

We continue to see improvement in our metrics. The DCs are somewhat seasonal based on sales volumes at the stores. They are most efficient in the highest pick and pack portions of the year and leveraging the fixed costs. So sequentially it does not always answer the question. But when we look at our expectations and our performance versus plan and versus the prior year, we continue to sequentially improve based primarily on the newer distribution centers. We have a number of new DCs in our network, the team members and management becoming more efficient, and also the sales volumes per store increasing for the stores they are servicing.

So we would expect next year to be another good year of improvement driven by the newer DCs becoming more seasoned.

Okay. And one follow-up, if I may. So your guidance, Tom, for 2012 of $427 million from $437 million does not include future buybacks. You said free cash flow is forecasted to be $600 million to $650 million, and your debt to EBITDAR is below your targeted levels.

If we look at the working capital that can be generated from the AP inventory moving up another 10 percentage points, which would be $200 million there, combined with your net income levels that are expected to certainly increase in 2012, I mean is it not unreasonable to assume under pretty steady-state conditions that you can buy back somewhere between $750 million and $900 million in stock in 2012 that is not factored into your guidance?

Well, we are going -- it is hard to put a number on exactly how many shares we are going to buy back, but but we look for this to be another very good free cash flow year as we continue to try to catch up to our competitors on the AP to inventory side and anticipate good financial results. So we will be out in the market aggressively returning capital to shareholders, and we think that can provide good value to them. So it is going to be a big number, and we will determine what that number is as we roll through the year.

Tony Cristello, BB&T Capital Markets.

A question is on traffic. You talked about ticket being the driver of sales. Your discussions and comments on DIY and a focus on customer service, can you maybe tie in how you can get store traffic for the DIY customer up? I mean obviously that is going to be a function of market share, but what do you do to leverage customer service initiatives in terms of them getting those customers into the stores?

Well, the way we look at it is very simple. DIY traffic -- if a customer is -- if they buy parts from one of our competitors right now, we have to do something to initiate them giving us a try, and that typically happens via advertising and promotions that we run. And what we will do, as we have done in the past and as have others in the past, is run hot promotions on frequently used items like oil changes or other items to get customers in our stores.

Like I said, there is not a lot of loyalty when it comes to those kinds of things as customers like to take advantage of specials that companies like ours run. And we hope that while we have them in the store, we are able to convert them to a our customer.

The other opportunity we feel like we have is that we have not been as aggressive in marketing to the Hispanic customers in the past as what we maybe should have been and what we would like to be now. And considering that we are in very in many markets now that have a heavy Hispanic population, many of which are heavy DIYers, we have got a marketing plan this year to address that market, and we are working not only through marketing to drive Hispanic customer traffic but also in store staffing to make sure that we have team members in place in those markets that are bilingual and can help those customers with solving the issues they are having with their vehicles.

When you think about a strategy like that, it obviously takes time to build, especially as you move into the East Coast and the mid-Atlantic and Northeast markets. When you look at the activity to run promotions or target that demographic, how do you then think about a DIY margin that typically then comes in higher versus setting that customer -- or having that customer used to getting those promotions and maintaining them? I understand the customer service side, but what keeps them without some type of loyalty program or something else from just going right back to where they were across the street?

Well, you hope what happens in your stores is they experience a level of service that encourages them to come back the next time they need a part. I mean we all run promotions, and my guess is that a lot of customers that are our customers or any of our competitors' customers, that they go in our competitors' stores, too, just like theirs come into ours when we run specials.

What we all hope is that the experience they have in our store is better than the experience they would have in a competitor's store, and they become our customer, realizing that when someone runs a really hot loss leader type special, you risk losing a customer because they are going to go in a competitor's store and give it a try. Our hope is that the service levels that we can provide are maybe a notch above and that we retain more of those customers than what we get just on a one-time basis.

Okay. So it is more than just competing on price?

It is much more. In our business, it is much more than just competing on price, simply from the perspective that it is -- hard parts inventories, if you have the parts that they need to maybe go along with the hot oil change that they were getting, it is the team members they have working on the counter that can give advice and just help them with their car maintenance needs, it is a combination of several things that result in a customer hopefully becoming loyal to us.

To me it goes beyond whether or not you have a card to store credit on when you make a transaction. Customers in our business are looking for more than that when it comes to figuring out how to repair their cars. In many cases they really don't know what they are doing, and they are looking to us for advice on how to solve a problem that they have, and we feel like that we have a strong group of team members who deal ongoing with a lot of do-it-for-me customers who are professionals that require that our team members know a lot about auto repair to give them the service that they expect and that we try to carry that over into our DIY service.

Gary Balter, Credit Suisse.

It is Simeon in for Gary who might be on as well at some point. It was mentioned that DIY did contribute in the quarter. Can you talk about how that played out in the CSK stores versus the core O'Reilly stores?

Well, we have not broken down the details of that. But what I would say is we have had some -- and we have talked to some conversion issues when we convert the systems of classifications of on the CSK system whether they are a professional customer or a DIY customer.

What we would say is in the fourth quarter we saw a sequential improvement in the DIY comps at the CSK stores. And, as Greg commented in his prepared remarks, we continue to have a great opportunity to reclaim market share that the CSK stores used to have on the DIY side of the business.

Okay. And then following up on this weather topic, in the markets where weather did break, did you see the normal seasonal uptick?

And then some of the comments about January suggests that maybe there was some deferral. But, in general, when you get a lack of extreme weather, how does that impact more? Does it limit the amount of breakers that you get in a couple of periods from now when the weather changes over again?

To answer the first part of your question, yes, in markets where you have where we have had some regional winter weather, that has been a driver. To answer your question about the maybe deferred demand that can be the result of extreme conditions, that is a factor. Not as much with cold weather as it is with hot weather and really hot temperatures. Batteries and electrical components are set to file, but in many cases they do not fail until they are put under pressure in real cold weather. So it is a little bit more of a factor with summertime than it is winter time, but that is a lot of a factor with future repair. It's not a big factor, but it is a factor a bit more so in the summer heat than it is winter cold.

Just to clarify on the customer service focus, was that across the business, or are you addressing an opportunity more specific to DIY I think that we talked about or versus do-it-for-me?

Our efforts are still to be as good and better as we have ever been on the do-it-for-me side. So we continue to put all of the effort we possibly could into growing our do-it-for-me business. We see an opportunity for us to do more DIY business per store than what we are currently doing, more on pace with our two primary retail competitors, and we are working hard at putting some programs in place that we think will put us in a position to gain some market share on the DIY side, and we are working hard with our store operations group.

We just had our store managers conference in Nashville a couple of weeks ago, and we are implementing some programs that we think will help us through the promotional traffic that will be created by their advertising and marketing programs to retain some of the DIY business that will be walking into our stores to take advantage of these promotions because of some of the things -- (multiple speakers)

Is that more of an opportunity in the CSK stores or in O'Reilly, or is it pretty much across the board?

I think it is pretty much across the board.

Dan Wewer, Raymond James.

Two questions. First, Greg, you talked about CSK continuing to generate the best same-store sales growth inside the Company. As I recall, the objective is for the sales per store for those 1300 stores around [$1.8 million, $1.9 million] per location, correct me if I'm wrong. Could you tell us that at the current trajectory, how many more years will be needed to reach that sale bubble?

Tom, do you want to take that?

We are not giving details of the individual stores. We stopped a number of years ago. What we would say to that is, when we look at a new store for us, it is five years to maturity. The DIY side of the business matures faster than the do-it-for-me side of the business. The good shops in the areas must have a good supplier, or they would not be a good shop, and it takes time to build that relationship. So we have a number of years to go until we get to that saturation point. So that would be our comment on that.

In Greg's prepared comments, he talked to that we expect to see continued strong do-it-for-me growth at the acquired markets for the next several years.

I will ask you the question this way then. If it takes five years for a store to mature and you think about the 1300 stores as new stores, when did the meter start (multiple speakers) new stores, was it two years ago or three years ago?

The meter started at various times depending on when the store converted to our system and started to have the full distribution capabilities that we offer as part of our dual market strategy. So the stores in the middle of the country where we already had distribution reach started in 2009. Most of them started in 2010 as the DCs that were built to support them opened.

So probably two or three years it sounds like would be the answer to my question in terms of when you would be reaching that kind of sales objective.

The other question I had was on your comments about merchandise margin improving, contributing to most of 135 basis point increase in LIFO gross margin rate. Can you tell us what the gross margin rate was measured by FIFO? I don't think that was included in the release.

Well, we don't calculate that specifically. Our LIFO reserve is last buy versus LIFO, not FIFO versus LIFO, which is the requirement. I can tell you that during the quarter our reserve for LIFO decreased $7 million, although the impact on gross margin was significantly less than that.

Matt Fassler, Goldman Sachs.

Two questions. The first relates to some of the business metrics. As we end the year and you think about your results on an annual basis, 2011 versus 2010, obviously the comps moderated in aggregate from [making change down to $4 and change]. Can you give us a sense as to the magnitude of deceleration for the core O'Reilly stores versus the CSK stores and then perhaps for the DIY versus the do-it-for-me? You already gave us some clue as to the second, but on O'Reilly versus CSK, did CSK comps moderate along with the rest of the base?

We can kind of come back to this, we are reporting consolidated comps and really not giving color beyond that. We would tell you that the CSK stores continue to perform above the Company average, and we would expect that to continue. And that do-it-for-me has been stronger than do-it-yourself.

And any comment on whether their margin of add versus the rest of the chain widened in 2011?

No comment.

Okay. And then secondly, you alluded to some changes in your parts lookup platform, at least the pilot program for 35 stores. Any sense as to the nature of the enhancements and how they can tangibly help the business going forward?

To quantify what it would mean to us from a sales standpoint, that would be incredibly difficult. It will make a positive difference in our ability to look up parts and sell parts and sell related items that go along with parts. And that system is just a very robust system that we have developed ourselves, and we are real pleased with it. It is way early in the deployment to pass along any speculation as to what it could potentially mean to us. We do know that it is much, much better than the system we are using today and should generate very positive results for us.

It sounds like from what you are saying the capability of driving ancillary sales would be a big difference versus your legacy system?

That and just access to product content. Just access to specifications, diagrams, capacities, pictures, just all the things that a parts specialist would need to know and need to be able to convey to a customer about a product. This system is just very robust in its ability to access that information very quickly and depict it in a graphical way so that we can show it to a DIY customer or with a professional customer to help communicate with them when we are on the phone as to what part they are talking about, what specifically they want, things like that. It is a very robust system that we will do very well with.

One of the other things that I would add is we are using an outside party for our catalog right now, and they determine what categories go into the electronic catalog, and it is a very robust electronic catalog. But we stock additional items that are not in the catalog, and it is up to our team members to go to the paper catalog, and the parts are in there. So our ability to manage all the breadth of the product that is in the catalog will be a big positive for us.

Scot Ciccarelli, RBC Capital Markets.

Two questions. Number one, any real geographic differences in the sales performance in the quarter that you can outline for the group? I understand weather had an influence in various areas, but anything you can identify from a geographic basis?

The only thing that we would say, and I think we have already said, and that is that the CSK converted stores continued to lead our company in comparable store sales. So that would imply that the Western stores got comped better than the Eastern stores by virtue of the fact that we are bringing those stores into the do-it-for-me supply business whereas they had previously not really been in that business.

All right. But nothing else noticeable outside of that?

No.

Okay. And then, second, and I guess this is a bigger picture question, I do understand that the automotive base in the US has over 240 million vehicles, but are you guys concerned at all or what is your thought process regarding the acceleration in new car sales that we have seen over the last four months here?

Well, we expected it. We did not think that new car sales would stay down at the 10 million or 11 million annual rate that they were at, and we expected that over time it would increase some.

Our careers have been spent in times when annual vehicle sales were up to 16 million, 17 million. So it is an expected thing. It is just part of the cycle of vehicles that get enough miles on them that they roll off the road and go to a salvage yard. And with the average age having increased to where it is, I think people are experiencing that cars can be driven at very high mileages with good maintenance. I think a lot of the cars that are coming off the road and being replaced will be put back on the road as used vehicles that will be on the road for several thousand miles yet.

Do you think that slows down -- I guess my question is, the acceleration side that we have seen, do you think that slows down maybe the improvements in maintenance per vehicle that we have seen over the last couple of years? Because obviously the growth of the industry -- comp growth of the industry accelerated pretty meaningfully as the SAR dropped. I'm just wondering if you think the inverse is also potentially --?

Our perspective is that as the SAR increases, it is a symptom of the economy improving. And as the economy improves, there is more commuter miles driven and people have more money to spend generally. And so they are -- it is a mitigating factor to the fact that there are new cars, more new cars coming on to the road.

Clearly higher new car sales are not good to the short-term growth of our business. But, again, we are talking about 240 million vehicle population and the difference between maybe 12 million and 14 million, so 2 million vehicles a year coming into the population that are new vehicles as opposed to vehicles that are out of warranty.

More importantly to our industry demand as a whole is not the SAR but the scrap rate. To the extent that the SAR goes up and the vehicle population goes up, that is a positive for our industry. So we watch the scrap rate, and as we talked about in our prepared comments, we think a long-lasting benefit for our industry is vehicles staying on the road longer and driving at higher mileage in that scrap rate and when the vehicles come off the road is the key to our industry.

Ladies and gentlemen, we have reached our allotted time for questions and answers. I will now turn the call back to management for any final remarks.

Okay. Well, I will just wrap up by saying thanks for your time, and we are looking forward to reporting our first-quarter results at the end of the first quarter, and we will be working hard to make sure that we generate solid results. Looking forward to a great 2012. Thanks.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.