Advance Auto Parts, Inc. (AAP) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Advance Auto Parts Third Quarter 2012 Conference Call. [Operator Instructions] And today's call is being recorded. Before we begin, Joshua Moore, Director of Finance and Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning, and thank you for joining us on today's call. I'd like to remind you that our comments today contain forward-looking statements we intend to be covered by and we claim the protection under the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments or results and typically use words, such as believe, anticipate, expect, intent, will, plan, forecast, outlook or estimate, and are subject to risks, uncertainties and assumptions that may cause the results to differ materially, including competitive pressures, demand for the company's products, the economy in general, consumer debt levels, dependence on foreign suppliers, the weather, business interruptions and other factors disclosed in the company's 10-K for the fiscal year ended December 31, 2011, on file with the Securities and Exchange Commission. The company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available. The reconciliation of any non-GAAP financial measures mentioned on the call with the corresponding GAAP measures are described in our earnings release and our SEC filings, which can be found on our website at advanceautoparts.com. Also I'd like to remind you that it is our company's policy to not comment on rumors and/or speculation, and we continue to follow that policy throughout this call. For planning purposes, our fourth quarter earnings release is scheduled for February 7, 2013, before market open, and our quarterly conference call scheduled for the morning of Thursday, February 7, 2013. To be notified of the future dates of our earnings reports, you can sign up through the Investor Relations section of our website. Finally, a replay of this call will be available on our website for 1 year. Now let me turn the call over to Darren Jackson, our President and Chief Executive Officer. Darren?

Thank you, Joshua. Good morning, everyone. Thanks, for joining us, and welcome to our third quarter conference call. Before I begin, I'd like to thank our 54,000 team members for their hard work and focus on delivering great customer service. Their determination provided us much-needed momentum during the quarter. As you've seen in our earnings release and as we indicated in our prerelease last month, our business and industry continues to face weak consumer demand in both DIY and Commercial. Additionally, we continue to be impacted by varied geographic performance with softer sales performance in our cold weather markets. Consumers still face high gas prices, which increased $0.49 a gallon since July and averaged $3.73 a gallon during the quarter. We believe this volatility in higher fuel costs definitely played a role in consumer behavior and spending in the quarter. As we stated in our second quarter call, we anticipated that the market would be challenging and that demand would continue to be weak. However, our focus has been to improve our sales trajectory in the face of near-term decelerating trends in our industry. As a result of these efforts, our comparable store sales accelerated nearly 100 basis points from the second quarter to the third. Our quarter-over-quarter improvement was principally driven by our Commercial Business, with accelerating comp sales growth each period during the quarter for our Advance stores. Our Commercial business had improving trends in both transactions and ticket. Our third quarter transaction growth sequentially improved throughout the quarter. While our average ticket in Commercials still faced declines year-over-year, the decline was more moderate versus our second quarter. Similar to our second quarter, the average ticket decline was principally driven by a mix of products sold, namely, the impact of weaker maintenance category sales and higher promotions. Further impacting the average ticket has been lower inflation in some key seasonal categories, like AC in the absence of escalating oil prices. From a geographical perspective, we continue to see weakness and volatility in our cold weather markets, especially in the Great Lakes and the Northeast regions. Our performance in those 2 markets continues to be impacted by the lingering effects of last year's warmer weather -- let's say, this year's warmer weather. Our comparable store sales declines continue to trail our total company average by several hundred basis points. However, we've seen our comps accelerate in the Northeast roughly 300 basis points from the second quarter and by nearly 130 basis points in the Great Lakes. This is very encouraging and is a testament to the will and determination of our teams operating in those areas. We continue to post positive comps in our Western markets, where we only have 10% of our store base. Despite the improvements in our business during the quarter, our comp store sales decreased 1.8%. We believe that the industry will remain soft for the balance of the year. However, we believe we will continue to carry our momentum from the third quarter into Q4, provided we see a reasonable bounce back from the effects of Hurricane Sandy. The improvements we've made in the second quarter came with a cost. Our result to work to deliver higher results than our trends suggested as we exited Q2 compelled us to increase the customer facing and traffic-driving elements in our business. This included increased labor and advertising expense, as well as more targeted promotions. Our increase in labor was focused on providing better service levels to our Commercial customers and coverage during the weekends were we have significant opportunity to better serve our customers. We invested in labor to position us to get back to positive comps. Our advertising spend was focused on driving our battery business in anticipation of increased demand as a result of record heat this summer, which we expect to be a catalyst for demand over the next 6 months. Our battery sales performance was very strong, with roughly 200 basis points of comp acceleration from Q2 to Q3. As a result of increased spending to improve our trends, our operating income decreased $27.5 million to $150.4 million. Clearly, this was lower than we planned. As our full year outlook suggests, we will adjust our costs in the fourth quarter to more closely align with the previous planned spend profile. As I previously mentioned, we made specific investments in the quarter to position us to capitalize on the underlying fundamentals of our industry, which remained positive. Our focus will continue to be to provide our customers with reliable service, increased delivery speed and superior availability, which has propelled our Commercial gain and is critical to our DIY success. Our investments and priorities have been centered on those outcomes. Our progress on our initiatives this year will provide us with momentum for the future. The mission-critical outcomes in the third quarter included completing the in-sourcing of our commercial credit program, shipping from our new distribution center of Remington, Indiana and the expansion into the boroughs of New York. In closing, I want to share a story about Jim Nevins [ph], a commercial parts pro in Dacula, Georgia. Jim is a shining example of how we're striving to consistently deliver fast reliable service to our Commercial customers. Jim is more than just dedicated. He truly takes ownership and is fully invested in helping his customers be successful. Having managed a shop himself, he understands that relationships create a 2-way street. His general manager says that Jim creates true value for his customers and for the advanced brand. He sees no obstacles when locating what his customers need. He only sees challenges. Jim not only finds satisfaction from accomplishing the feat at hand, he finds an even greater reward when he knows that he has solved someone's problem and has helped that individual to be successful. He uses every resource available from the Internet to local suppliers to make sure our customers are satisfied. Jim's customers know the quality of his service and his ability to find anything they need. Jim's dedication to Advance and to his customers is truly inspiring. His drive and unwillingness to accept failure differentiates his level of service from the competition. Jim, thanks, and keep up the great work. Now, I'd like to turn the call over to Kevin Freeland, our Chief Operating Officer. Kevin?

Thanks, Darren, and good morning. I'd also like to thank the team for their hard work in the third quarter. I'll provide updates on the work that occurred during the quarter as well as update you on our initiatives to support our superior availability strategy and new store growth. Despite the current softness in some of our major markets we operate in, we continue to focus on providing our customers with the best end market availability and consistency of service, both in order accuracy and delivery speed. As I'll share with you, our focus continues to be on the expansion of our hub network, the continuous upgrade of our parts in our non-hub stores, the opening of our new DC and the implementation of our daily replenishment capability, and the continued growth and rollout of our B2C and B2B e-commerce platforms, commercial diagnostic tool and our electronics part catalog. During the quarter, we continue to expand our hub network through new store expansion in the upgraded existing stores, which are strategically positioned to operate as a hub. Our focus continues to be on strengthening our availability of both maintenance and failure parts, as demand for these products will increase as the average age of vehicle increases. During the quarter, we added 8 additional hub stores, bringing our hub store count to 328 versus 288 at the end of the third quarter last year. We also upgraded inventory at 363 non-hub stores during the quarter. As scheduled, we've begun our first outbound shipments in September from our new distribution center in Remington, Indiana. As I mentioned before, we're very excited about this new facility as it will be used for a model for our future in terms of automation, which will greatly improve our productivity and allow us to replenish our stores daily. This new facility will ship product to our stores in phases, ramping up to over 400 stores next year and provide daily replenishment to over 200 stores. The initial results at Remington have been good, and we're achieving our rollout plans. Although we're very early in the process, we're extremely excited about the prospects and will continue to work aggressively to ensure we get the planned benefits. As a result of these upgrades and opening of our new distribution center, our total inventory increased 4% to roughly $2.2 billion. We anticipate our total inventory will continue to grow over time as we focus on increasing the breadth of our parts assortment and improving our positioning with larger Commercial customers. At the same time, we continue to work aggressively to free up capital to fund other parts of our business through our supply chain financing program. As a result of that work, we continue to expand our accounts payable to inventory ratio, which increased roughly 803 basis points from 75.2% at the end of the third quarter last year to 83.2% this year. As a direct result, we've reduced our own inventory by nearly 30%, a decrease of $155.5 million from $523.7 million to $368.2 million. Turning to e-commerce. We continue to focus on growing our business through expanded penetration of our B2B capabilities to our Commercial customers. We've rolled out our B2B online ordering capabilities, and we expect to continue to increase the B2B penetration over time. This will allow us to increase both the frequency and retention rate of our Commercial customers who utilize this capability. Additionally, we continue to broaden our ability to provide more value-added services to our Commercial customers through MotoLogic, our shop diagnostic capability and DriverSide, which allows us to provide services aimed at helping our Commercial -- our customers grow their business. These capabilities will allow us to be a much stronger partner for our customers and make it easier and more compelling to them to do business with us. Finally, with respect to e-commerce, we continue to make great progress with our B2C site, and I'm proud to announce that we now have the #1 multichannel site in the markets we serve. This is a great feat and reflective of the team's hard work and strength of our brand and online capability. We will continue to enhance our mobile commerce business and increase the level of convenience for our DIY customers. We continue to focus on our new store opening strategy with an emphasis of building out more commercially oriented stores and expanding in markets within our current footprint that remain under penetrated. During the third quarter, we opened 35 stores, including 7 Autopart International stores. Year-to-date, we've opened 70 stores, including 13 Autopart International stores and closed 5. As of October 6, 2012, our total store count was 3,727, including 210 Autopart International stores. Our class of new stores continues to perform very well and is proving to be our most successful class in terms of sales productivity and the pace of their weekly sales ramp. Additionally, we began opening our first stores within New York City and anticipate opening roughly 18 stores in New York City this year. The entry into this very large market is an important milestone for us. For the year, we remain on pace to open approximately 120 to 140 stores, including the expected addition of roughly 65 stores in Q4 and are building our pipeline that allow us to open approximately 180 to 200 stores next year. Finally, we focused on reversing our decelerating sales trends, and as a result, strengthened our competitive pricing position and increased our promotional activity during the quarter. However, our gross profit rate increased 31 basis points to 49.8% versus 49.5% during the third quarter of 2011. The increase was driven by our continued efforts to improve our shrink, cost deflation and supply chain efficiencies, partially offset by increased promotional activity during the quarter. Year-to-date, our growth -- gross profit rate was 49.9%, which is essentially flat during the same period in fiscal 2011. We will still remain on track to modestly improve our gross profit rate for the year. Now let me turn the call over to our Chief Financial Officer, Mike Norona, to review our financial results in more detail.

Thanks, Kevin, and good morning, everyone. I'd like to start by thanking all of our talented and dedicated team members for their commitment to serving our customers as we navigated through a challenging third quarter. I plan to cover the following topics with you this morning. One, provide some financial highlights from our third quarter of 2012; two, put our third quarter and year-to-date results into context with our expectations and key financial dimensions we use to measure our performance; and three, share with you what we see for the remainder of 2012 and insights into how we are thinking about 2013. As we shared in our October 22 prerelease of our preliminary financial results, our third quarter performance continued to reflect ongoing softness in our colder winter markets driven by the lingering impact of this year's milder winter. In addition, our tough economic environment continues to impact consumer demand for auto parts as evidenced by softness in both our maintenance and failure categories. While sales trends improved from our second to third quarter, we did not achieve our profitability expectations. Our profitability shortfall was driven by deliberate decisions to improve sales trends and position the business to capitalize on the solid industry fundamentals we see. We targeted areas such as store labor and seasonal advertising to get back to positive comps sales growth and improve our market share. We also stayed the course with our planned investments in areas such as Remington DC and commercial credit in-sourcing launches, inventory upgrades and more aggressive store opening plans, including our new market entry into New York City, which is part of our new store opening plan in the fourth quarter. While we did not achieve internal expectations, we were encouraged by our sales improvement from our second to third quarter, primarily driven by improvements in our Commercial comps and the fact that we were able to accelerate our sales performance, while the industry decelerated from the second to third quarter. Our decision to trade off profitability in the short term is driven by our confidence in the industry fundamentals and ensuring we position the company for 2013 with momentum as we expect a more normal winter. Third quarter sales decreased 0.5% to nearly $1.5 billion, driven by our comp store sales decrease of 1.8%, partially offset by the net addition of 82 new stores over the past 12 months. Year-to-date, our total sales increased 0.7% to $4.9 billion, and our Comp store sales decreased 0.5%. As Kevin mentioned, our third quarter gross profit rate increased 31 basis points to 49.8% versus 49.5% in the third quarter of 2011. The increase was primarily driven by improvements in shrink, cost deflation and supply chain expenses due to labor productivity, partially offset by an increase in promotional activity. Year-to-date, our Commercial mix represented 38.2% of our 2012 sales versus 37.1% in Q3 of 2011. Year-to-date, our gross profit rate is flat to last year. Our SG&A rate of 39.4% increased 213 basis points versus the third quarter of 2011, primarily due to increased spending on in-store labor and advertising and expense deleverage as a result of our 1.8% comp store sales decline. Year-to-date, our SG&A rate increased 25 basis points to 38.8% versus 38.5% over the same period last year. I outlined the principal drivers of the SG&A change earlier in my comments. All in, our third quarter operating income dollars decreased 15.4%, and our operating income rate decreased 182 basis points to 10.3%. Our diluted EPS decreased 14.2% to $1.21 versus $1.41 last year. Year-to-date, our operating income dollars decreased 1.6% to $544.1 million, and our diluted EPS increased 3.6% to $4.34. Year-to-date, free cash flow was $298.6 million, down $56.2 million over the same period last year. The largest driver of the decrease in free cash flow was an increase in our accounts receivable as a result of our in-sourcing of our commercial credit program. As Kevin mentioned, our owned inventory decreased 29.7% from third quarter 2011, driven by our continued efforts to increase our accounts payable inventory ratio, which now stands at 83.2% versus 75.2% in the third quarter of 2011. At the end of the third quarter, we had $479.4 million in cash and $600.2 million of long-term debt on our balance sheet. Our adjusted debt-to-EBITDA ratio was 2.2x, which is well below our previously stated ceiling of 2.5x. Our average diluted share count was 74.1 million shares at the end of the third quarter. As we've mentioned, our industry continues to face weaker consumer demand and softness in the colder weather markets, both of which are impacting our results and contributing to the overall industry deceleration. However, we believe these dynamics are not indicative of a longer-term market slowdown. Specifically, the deferred maintenance reached a record $68 billion according to the most recent industry data. We believe the industry fundamentals remains solid and are encouraged by our team's ability to improve our sales trends from the second quarter. We continue to measure our performance through the financial dimensions of growth, profit and value creation. As we have consistently communicated, we prioritized growth as our primary use of capital to increase shareholder value, which includes investing in strategic initiatives to improve our performance and looking for future growth opportunities. Accordingly, there will be periods of time when we preserve capital as we assess sales growth opportunities to create value for our business and shareholders. Over the past few quarters, we have been assessing some sales growth opportunities. At the end of our third quarter, we had roughly $500 million left under our share repurchase authorization, and we plan to continue our historical practice of opportunistically repurchasing shares in a disciplined manner over time. Turning to profit. We remain committed to improving our profitability, which requires both delivering on our sales growth goals, primarily driven by Commercial, and continuing on our journey to develop a more cost competitive operating model. Improving our profitability requires that we do both. Given the softness in our top line and our deliberate decisions to increase customer traffic with increased advertising and labor, in the short term, our profitability growth has been constrained. We are not satisfied with these results and remain committed to improving our profit model by continuing to invest in both Commercial and availability to drive the top line, while more effectively managing our cost structure. As we looked at value creation, we continue to maintain our disciplined approach to capital, which is reflected in our return on invested capital of 18.9%. ROIC increased modestly from our third quarter last year, driven by efforts to decrease our owned inventory, despite increasing our average inventory per store. Our AP ratio at the end of the third quarter was a record 83.2%, and we remain focused on achieving an AP ratio of 100% over time. Turning to the balance of the year. We anticipate that the environment will continue to be challenging with our cold weather markets still underperforming our total company average comp store sales by several hundred basis points. Additionally, I would like to remind you that our fourth quarter is our lowest volume and most volatile quarter, as we compete with holiday shopping season and lower demand for parts. We continue to expect our annual comp store sales to be slightly down for 2012 and anticipate that our gross profit rate will improve modestly for the full year. While we expect to see a more normal winter, this will show up in the first half of next year, and therefore, we expect our cost to deleverage during our fourth quarter given the expected sales decline. We will continue to adjust our variable costs to business trends, but plan to invest in our strategic areas, such as Commercial and availability to our previously planned levels, so we position ourselves with momentum for 2013. As a result, we continue to expect our SG&A per store to be down 1% to 2% for 2012. As a result of our third quarter earnings performance and what we see for the fourth quarter, we anticipate our annual 2012 EPS to be in the range of $5.05 to $5.15 per share. As we look to 2013, we will continue to build on our growth and profit successes over the past 5 years. We expect industry dynamics to remain favorable as a result of the continued increase in the average age of vehicles and the continued increase in the number of vehicles greater than 7 years old. We anticipate a return to more normal weather patterns and expect our top line growth to be driven by stronger Commercial comps, continued improvements in our availability and an accelerated pace of new store growth in the range of 180 to 200 stores. We expect to improve our profitability, driven by a modest improvement in our gross profit rate and through reductions in our SG&A through our continued focus on building a more competitive cost structure and by leveraging a better top line. We will provide a more detailed 2013 annual outlook on our fourth quarter earnings call. In closing, we were disappointed we did not deliver the financial results we expected in our third quarter. We are also realistic about the challenging environment and the short-term impact it is having on our business. We believe the current industry softness will continue to put short-term pressure on our fourth quarter earnings. We remain committed and focused on our strategies, and we have confidence in our team's ability to improve our performance. As they have shown many times, when faced with adversity, they always respond with character, resiliency and a competitive spirit. Before I turn the call over for Q&A, I'd like to make one final comment. I am sure you have seen recent press reports about our company. I would like to repeat Joshua's comments and remind you that it is our company policy to not comment on rumors and/or speculation. And we will continue to follow that policy as we address your questions. We will be happy to answer your questions regarding our business operations, strategic initiatives and financial results. Operator, we are now ready for questions.

[Operator Instructions] Our first question today is from Greg Melich with ISI Group.

I believe in your comments there, and you mentioned that you expect to carry momentum from the third quarter into fourth quarter. When you talk about that, is that something that you've seen already? And when you think about momentum, is that the sort of 100 bp improvement that you saw from the third quarter to second quarter?

Yes, Greg. You were cutting in and out. I think what your question was our comment on business as we went throughout the third quarter, as we saw sequential improvement each period in our Advance stores, particularly in our Commercial business. And our glimpse coming into the quarter as we expected that to happen, I said in my prepared remarks, inevitably, Hurricane Sandy, which impacted about 400 stores, now we're up and running in all but 2 today, certainly gave us a little bit of a setback. What we've seen before is that as FEMA money comes in and insurance money comes in, that tends to bounce back. Now the Northeaster was a little bumpy, too. So we think if that settles out, those trends will continue throughout the fourth quarter.

And I'm very hopeful this is better.

Yes.

So that when you talk about momentum, you're talking about that 100 bp improvement that you saw in the third quarter. You think you can have a similar improvement into the fourth?

Yes, we didn't quantify it exactly 100 basis points. But what you should have taken away from it is that period in, period out, we're seeing improvement in each period. And as we entered, we would expect that to occur in the fourth quarter, too. Whether it turns out to be 100 basis points, we'll see at the end of the third quarter.

Our next question is from Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Darren, over the years, you and other CEOs in your industry, have talked about the rational competitive environment. And the fact that promotional pricing doesn't drive demand for auto parts, that's driven by failure rates. Curious as to why you now think that promotional pricing could make a change in demand, and whether the elasticity turned out to be what you thought it would be?

Yes, Dan. This is Kevin. Essentially, as we were trying to improve performance, we were looking at various elements of our business that do, in fact, respond to price. We have a fairly material direct mail program, and the offers that are in those programs vary from period to period based on expectations. And we took a more aggressive posture in the quarter and got material results or noticeable results. And is that what the general DIY consumer reacts to? No. But there are price sensitive or price-conscious customers that do respond, and we are able to tailor the mailings accordingly. On the Commercial side, again, it's -- if you look at the customer response, price does not show up at the top of the list. But there is some level, especially on the chemicals business that we provide in or shop supplies, other than the fact, our -- have always been relatively promotional. And we leaned into some of those areas. I don't know that our general belief on the industry has changed. But in an effort to essentially turn the business around, we adopted a posture in the quarter that's leaned more into some of those categories.

Yes, Dan. Maybe to build on Kevin's point. I would say that part of our research tells us today when we look back 5 years ago, I think it was roughly 20% of our DIY customers started out online in terms of their shopping experience. Today, what it tells us in more recent research is 55% to 60% of those customers are really starting out -- starting online to understand parts availability, price, location. And in that same research 5 years ago, price was still in the top 5, but it might have been #5. Today, price has moved to #1. And so that doesn't necessarily mean we put everything on sale. But I think we're more targeted, as Mike said in his prepared remarks. Deferred maintenance, we were at AAPEX last week, and it was ASA said that number had risen to a record level of $68 billion now. What it says to me is that we have maintenance building. And to Kevin's point, this quarter, we targeted things like batteries. It's intuitive, given the heat that we had over the summer and even in the quarter. As we go into the fourth quarter and the first half of next year, increasing our awareness, not necessarily taking down the price, is going to be critical in terms of driving out some of that future traffic in the business. And also targeting certain parts of the business, as Kevin said before, in those deferred maintenance categories just spurs some demand. So it's not a fundamental shift. But I think it is a recognition that we have maintenance building in the system, and we want to be on the front end of some of that awareness and traffic driving. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: And just as a follow-up. We estimate during the quarter that Advance needed about a 3.9% comp sales gain for the company to maintain a flat expense rate. And the hurdle point is the highest since the first quarter of 2011. The past year, you've indicated that the next 200 basis points of operating margin improvement for Advance would come from expense leverage. Do you still think that's the case? Or are we going to be coming -- and a lot more reliant now on sales growth rather than expense cuts to drive future margin -- operating margin gains?

Hey, Dan. It's Mike. I think it's both. So first of all, obviously, our goal is to continue to grow our business. So when you grow your business, you're able to leverage that top line. So that will always be a priority of ours. You need to look within the components of what happened in our SG&A. Actually, our SG&A per store fell 1.7% on a trailing 12-month basis. And if I gave you the breakout of the components, I think it will be easier for you to understand. So 25% of that basis points deleverage was just from fixed costs deleverage of things like rent and depreciation, the fixed cost structure. 25% was from us growing our stores. So obviously, we opened up 35 stores. We're going to have one of our largest store openings in the fourth quarter this -- as we look to the fourth quarter, about 65 stores. And then another 25% of that deleverage was caused by us maintaining our investment profile Remington, our credit in-sourcing that Darren talked about, our hubs, our inventory upgrades as we position ourselves for the future. Because we believe the fundamentals are good [indiscernible] We get a more normalized winter, we would expect the business to come back, our east business to rebound. And then the last 25%, and I said it in our remarks, is deliberate decisions we made to actually change the trajectory of our sales. So if you look at our sales from Q2 to Q3, they actually accelerated in terms of they got better, a minus 2.7 to minus 1.8. If you actually look at the industry, the industry got a little bit worse. So we invested a little bit more dollars in labor as Kevin said, seasonal advertising. And we think we changed the trajectory to the industry, but our view hasn't changed. Obviously, we need to improve our profit model, but that will be both on the top line and the bottom line.

Our next question is from Matt Fassler with Goldman Sachs.

My question -- my first question, my follow-up relate to your spending. So you put a lot of money back into the business here in the third quarter. If you look at the incremental spending relative to initial Street expectations and our own and you look at the incremental sales to emerge relative to expectations relative to last quarter, I guess those sales are pretty costly to come by. And obviously, it's not the optimal environment to reap a return on that investment. How do you think about the financial return on this reinvestment of the business and marketing and labor, et cetera? What are the parameters that you used to decide whether, frankly, they're justified? And then the follow-up question just to get it in, your spending per store this quarter was up about 3%. Obviously, that's different from the trajectory that you're implying for the rest of the year, and presumably, for your algorithm going forward. So how should we contextualize that spending level?

Yes, Matt. I'll give you kind of high level, and Mike will give you some of the details. So when we went in to this quarter, a way to contextualize it is we came out at Q2 a minus 2.7 comp. I think we said to everyone on the call that what we're going to focus on, if you think about a Commercial business, in particular, is our in-store labor. I think for the quarter, our comp labor hours were up a little over 1%, and those related to service levels. And when I look at our comp stores and comp transactions in our Commercial Business, again, they were up low-single digit. It's actually improved off of the Q2 trends. And that's actually us doing more business, building relationships with those commercial shops. And those things, I don't think get measured in the period or they get measured necessarily in the quarter because those commercial shops are going to start doing business again in terms of that $68 billion. In order to get that done, we get 338 upgrades in the quarter is my recollection in terms of inventory added to our hub stores. In particular, took advantage of the 22 stores that we didn't plan to acquire in New York in the quarter as well and opened Remington, which put some pressure on those numbers. And for our business, the way I thought about it is that absent making those investments, one can make an argument instead of doing a minus 2.7 comp, trajectory would have taken you to a minus 4. So there is almost a 220 basis points pickup in terms of comp store sales trend relative to the trends that were out there. And so part of the business, I would say, you got to make a choice as to how you want to get that profitability and rebuild momentum. I fundamentally believe that part of the decision we made, if you go back a year ago, I think we had our best expense leverage numbers since we were here in Q3. So I made a choice, and I made the choice to reestablish sales momentum. I made a choice in terms of the advertising, principally around battery and failure parts. Because it's going to come. I mean I said this on the last conference call, in 2008, we are in a similar third quarter situation, and we were all wondering why the business went flat. And then 2 quarters later, we were all high fiving because the comps were approaching numbers that were closer to 10. And I think that's how this business can turn on and turn off over time. I think the key is to be positioned for when it's going to turn on again, because the reality is those cars are still old. It's the categories in maintenance, which are giving us fits at this moment in time. But eventually, maintenance becomes failure if you don't take care of it. And so that's what we saw in the quarter in terms of how we think about it. Those things will pay back over time for sure. It's just it may not necessarily pay back in a 90-day window.

Yes, and Matt, your comment, we don't comment about SG&A within the quarter. Obviously, we report out on it, but we don't think about it that way. And the reason is so when I broke out previously in the last question, the breakout of our SG&A. So when the sales come back, that fixed costs deleverage will take care of itself. The 25% of that deleverage the came from stores, as Darren says I mean we're investing in stores today that are going to pay as we look out into the future. So we haven't seen any returns from those stores. And then the -- our investment profile in Remington, I mean Kevin has talked about this. It's in our remarks. I mean it's one of the most exciting things we got going in our company, this daily replenishment capability we have. Again, we haven't seen any of the benefits of that, our in-Store credits, our hubs, our inventory upgrades. So 3 quarters of deleverage is all kind of -- it will either take care of itself or it will pay back in the future. And I think Darren talked about the last 25% where the deliberate decisions we made, we think we changed the trajectory of the business and built some momentum.

Our next question is from Gary Balter with Credit Suisse. Gary Balter - Crédit Suisse AG, Research Division: Just following up a little bit on that. It seems like there was a little bit of a change where last year, you were more focused on the expense savings. And then somewhere along the way, Darren, you looked or the whole company looked and said, "Hey, we need to make these investments because there's all this deferred maintenance and there's all this opportunity." And you obviously have the investment in Remington and now more SG&A to set yourself up for the future. What caused the change? Like what was the strategic decision that kind of say, "Hey, we're -- maybe, we're being too tight on expenses." Or how did you change? Could you walk us through kind of how you're thinking?

Yes, Gary. So over the last 4 years, as you followed the story in terms of our transition to a 50-50 model Commercial and DIY, routinely, we used to speak about it in terms of the table stakes in the industry, which was first getting the right brands in our store, getting the parts pros, getting the trucks, building a sales force and even getting a website up and being able to do business in terms of B2B business. And call that the table stakes here of our business. Today, we have more, I would say, insight and clarity as to the next step of our journey. That step of our journey took us from roughly 400,000 a program to 640,000 a program. But we can see, and we've talked about this before is we probably got about 1.2 million of potential that sits around our stores today in terms of Commercial potential. And that 1.2 million, we're going to have to be more focused in terms of the customers that we go after. And there's no doubt given parts proliferation, and you just take import parts, for example, it's going to require more investments in those SKUs. And those customers are, quite frankly, they have more choices. There's more competition in the space. That's not a surprise. So what we're going to have to do is invest in things like commercial credit. We always knew that we would have to make that investment. As Mike said earlier, that's a 50% penetration business for us today. Most in the industry are closer to 90%. We find in order to do business with a larger garages, and that's the majority of the business we do today, we're going to have to target our capabilities, hence bring in-sourcing of credit. Remington, which we just opened, that facility sat vacant. It was built before this management team got there. Through productivity, we were able to keep it vacant. So when we actually had to finish completing it, we saw opportunities given tests that we were doing in daily replenishment to actually put a daily replenishment capability. And we think that will allow us to better serve those larger garages going forward. The other thing that we talked about in terms of targeting our capabilities going forward is that we spent probably a modest amount of time, Gary, in terms of the national and some of the regional accounts. As we position for the future, our first step was take your the customers closest to our store. The next step of our journey is that we, unlike some of our competitors, we don't have a heavy-duty business. We don't have a fleet business. We don't a government business, and we're probably underdeveloped a little bit in terms of national regional accounts. And we're beginning to put a focus in those areas. And as a part of that focus, that is going to have to require us to thoughtfully -- because despite all of that investment in capabilities, as Mike said, we're still going to be down nearly 2% in terms of SG&A per store. But we're funneling where we are investing to position us, how do we get from 640 a program closer to that $1 million a program going forward? And I think when you -- businesses that they don't grow in a linear fashion. I think you have to step through them, as we did. Our first 10 years were $1 billion. The last 4 years, we added another $1 billion. That next $1 billion that comes after that is going to be targeting that against different segments of business and different customers that quite frankly have higher standards.

Hey, Gary, just to put some numbers to what Darren just said. First of all, I'll start by saying we have not changed our focus on improving our profit model and building a more cost-competitive structure. And if you actually look at our SG&A per store, it's down on a trailing 12 months to $659,000 per store, which is equivalent to where we were in about second quarter of 2010. So what that means is -- and we've built a lot of capabilities. And what we've done is we've moved a lot of SG&A. What you can't see the SG&A we moved out and replaced it with things like Remington, inventory upgrades, hubs and things like that, so -- but our focus, I want to make sure what you take away from us is our focus has not changed. And what's probably happening is when your comps are negative, it just puts more magnification on the SG&A. But looking at that trailing 12 months, I think, is an important number. Gary Balter - Crédit Suisse AG, Research Division: Just as a follow-up on Remington or the ones that follow Remington. Because I know Kevin made a comment at AAPEX that you plan to build up a distribution center, the distribution facilities. Can you talk about what's coming after Remington and what the cost of those facilities are?

Yes, Gary, this is Kevin. We -- essentially, we're looking at facilities that we have today, which what we had with -- as Darren said, Remington was not a building that we built for this purpose. It was a building that was essentially not needed. It was built in advance of need based on essentially engineered standards that we had put in the existing fleet of DCs that bought us far more time than the previous management would have had -- would have believed. So we're leveraging an existing building. We have 8 other primary distribution centers at this point, and a lot of our focus at this point is there, and essentially taking what we have built in the model from Remington, which was fairly expensive for 2 reasons. There was a great deal of assistance that we needed to figure out how to pull that facility together. We went from a relatively low level of automation to a high level of automation, changed out the -- both the warehouse management system and based on the automation, the warehouse control system. And so what we're looking at today is how can we leverage all of those investments with the fixed-costs structure that we have, with the supply chain that is essentially still using those legacy methods.

Our next question is from Mike Baker with Deutsche Bank.

A couple on the sales trajectory. I guess I was surprised. I think you said that the colder weather markets were still about 200 basis points worse than chain average, even though I think it's starting to get cold out. So I'm wondering if that's surprising, on the other hand, it's encouraging because you are seeing better comp trends overall. So where are you seeing those better comp trends, if not in the cold weather markets?

Yes, well, just to reiterate what we said in the prepared comments. So the northeast, where we have a dominant store footprint, those trends improved nearly 300 basis points in the quarter. In the Great Lakes region, I think we improved 130-some-odd basis points in the quarter. So as you said, we were some of the big movers that moved the trends in the quarter, it's going to be in those. Now we still have markets where, quite frankly, west of the Mississippi. We've got markets that were mid-single digit markets for us and regions for us. We said in our prepared comments the west, as you hike on down towards Texas, that was a good market for us. Even the Southeast, particularly in the Commercial business, was mid-single digits strong for us. But I think the larger picture, when you hear about our optimism in terms of as we look out, what we see are these regions of the country where they tend to be performing very well, and then we see other regions, whether it's the Northeast, we see them starting to point in the right direction. It might be getting cold out. We're selling a few more batteries, Great Lakes, similarly, the Plains, we didn't -- the Plains has been challenging, too. It's another cold weather market out there as well. So our view is, is that cold weather starts to come through and we talk about it in our battery comments, we saw our battery business, which is failure cold weather related, we saw those improve Q2 to Q3, 200 plus basis points in terms of comp sales trends. So I think those are all indicative that when we actually do get to turn the starters, the alternators, the antifreeze and all that tend to work in unison. The other thing that's occurring, too, is we are starting to anniversary some of those year-ago trends in terms of escalating oil prices on the oil price -- on the oil change specials. So it did give us a little bit of relief in the ticket this quarter. And so I think those all position us as we get to more normalized weather trends as we look out.

Okay. And so I guess if I could follow-up on that. If you were to adjust those cold weather markets, which were a couple of hundred basis points, worse than the chain, correct me if I'm wrong, but your comps would still be in the flattish area? Maybe up slightly or down slightly, which is down from where you were a couple of years ago even as the economy seem to be better than it was a couple of years ago. Is there something in terms of the aging of the vehicles, maybe sort of aging out of the sweet spot or cars that can be sold that people are opting for younger cars? Anything along those lines that you think could be impacting your business from a sort of multiyear perspective?

Well, we can all speculate as to what it is. I think the average age of vehicles last year to this year, even 2 years ago, was moved up 6 months. So you look in the larger scheme of things, and you say, is it really going to change because it's moved 6 months? I think new cars SAARs this year at 14.9 million will scrap roughly 13 million vehicles. Just doesn't seem large enough in order to move the iceberg. I think we said this time and time again on these calls is that, it's probably, from our vantage point, as we look at gasoline prices, and again you have to go back to '08, '09 and '10, when we saw that significant move down in terms of gas in the '09 and '10 period, I think we averaged about $2.42 a gallon. I think what happened is that we've freed up some discretionary income. That discretionary income, we could also see -- at that point, we had reached somewhat of a peak in deferred maintenance. It got spent on the car. We get some gas price relief, and I'm reluctant to say we will because it's -- we're no good in predicting it. We thought we'd have relief in the back half of this year, and we're $0.04 higher in the third quarter this year than we were 1 year ago. Now we dropped about $0.20 a gallon in the last several weeks. If we can sustain those levels, I suspect we'll take a relatively constrained consumer still at that lower income levels and give them an opportunity to spend some of those dollars back on their car, because what we can see in deferred maintenance levels is they've reached a all-time high in terms of the numbers that came out last week.

And I would just add one thing to what Darren said is what you're hearing from Darren is confidence and belief in the industry fundamentals. I'm not sure if you were also trying to get your question when you compare that. I mean in '09 and '10, we saw some uncharacteristically large growth in the industry from historical levels. So maybe what you see is a little bit of the industry, from a DIY perspective and in the Commercial, reverting back to historical growth levels, which are still good growth levels but they're just not at the same level as they were.

Yes, Mike, this is Kevin. We religiously track the mean time to failure of every component of every car by major manufacturer. And we clearly are seeing a later point in the vehicle at which key components fail. And it's just a testament to the quality of the vehicles that are on the road. We also see a high age, average age of vehicle, high average mileage per car. And essentially, cars are lasting longer than they did in the past. But the parts ultimately fail. And so essentially, what is built into the trends of the industry is yes, and actually, there's been quite a bit written on the sweet spot. There is a -- there are fewer cars in the sweet spot today than in the past, but the sweet spot appears to have moved. The car, essentially, retains its usability longer than it did in the past, and the sweet spot with which customers repair their vehicle is just occurring later in the life of the car.

Our final question today is from David Gober with Morgan Stanley.

So Mike, I just wanted to touch on the commentary around potential strategies to accelerate sales growth. I know you guys have talked about a couple of things, and I was just wondering if you could maybe bucket a couple of the other potential uses of capital. Because obviously, capital allocation has been a big topic of conversation. But when we look at potential uses, you talk about the acceleration in store footprint, the acceleration in building out the DC infrastructure. What are the other types of investments that you're thinking of and how can we kind of think about that process?

Yes. So as we think about our capital, and as we have consistently shared, we always prioritize growth, both organic and inorganic. So when you think of organic, our new stores are probably one of the biggest uses that we have had on capital, and we will continue to have in the future. So obviously, that's a big area. And one of the things that we shared in our comments is that we purchased during the quarter 21 previous [indiscernible] stores, so that will be part of our new store growth. So that will be an example of something organically. It's been well known that there's been a large number of small and large sales growth opportunities on industry this year. We don't comment on those. And what we do is as we look at our capital allocation and look at different sales growth opportunities, kind of the way we think about it is, is there an opportunity to expand our footprint? Is there an opportunity to support our strategic growth direction, particularly in the area of Commercial? And then is there a way in which we can leverage all the capabilities we built out? So that's kind of the frames we look at these things through. And what we did give you is we just gave you a little perspective that the company -- and I think Darren has consistently said this is a growth story, and we're always looking for things to grow our business and that fit with our business. But we don't talk about specific things we look at. But that's kind of a frame as to how we think about growth opportunities, both organically and inorganically.

That's very helpful. And I guess more of a, as a detailed somewhat near-term question on the impact of Hurricane Sandy. Darren, I know you mentioned the number of stores that were closed at one period. But just wondering if you can kind of refresh our memory in terms of how that -- how you think that impacts results over the next couple of quarters. Is there typically a pickup in business, given that you guys obviously, do you have a fairly high concentration in some of the areas that were impacted by the storm? And I guess how does that kind of balance the near-term -- maybe a drop for some period of time versus a pickup thereafter?

Yes. Well, there's 2 things that occur. As you come in to, whether it was Irene, Andrew, whatever, you see a little bit of a buildup before the storm, so lots of batteries, gas cans go out the door before. There is a lull for a period of time. And it really is connected to FEMA dollars, insurance dollars and the amount of devastation in terms of being able to get to our stores. As we highlighted, there were 400 stores. Of those, the good news is all but 2 are opened today. And there was no loss of life for team members or family in those storms. There will be a delayed period based on when those dollars start flowing back into the system. We would expect, as we approach quarter's end, that we'll see more of those flow into the system. The question will be, do they spend it on Christmas, or do they spend it on their car? But inevitably, those storms do create more wear and tear on the vehicle. And so it's again, a question of not if, it's a question of when. And if the when doesn't happen within the fourth quarter, it will spill over into the first quarter of next year. So that's what we would expect based upon prior patterns of these storms in the past.

I would now like to turn the call back over to Mr. Joshua Moore for any final comments.

Thank you, Wendy, and thanks to our audience for participating in our third quarter earnings conference call. If you have any additional questions, please call me at (952) 715-5076. Reporters, please contact Shelly Whitaker at (540) 561-8452. And that concludes our call.

Thank you. This does conclude today's conference. Thank you very much for joining. You may disconnect at this time.