Advance Auto Parts, Inc. (AAP) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the Advance Auto Parts Third Quarter 2013 Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. Before we begin, Zaheed Mawani, Director of 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 would 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, intend, will, plan, forecast, outlook or estimate, and are subject to risks, uncertainties and assumptions that may cause our results to differ materially. Our comments today will also include certain non-GAAP measures. Please refer to our earnings press release and accompanying financial statements issued today for important information and additional detail regarding these forward-looking statements and non-GAAP measures referenced in today's call. 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. For planning purposes, our fourth quarter 2013 earnings release is scheduled for Thursday, February 6, 2014, before the market opens. And our quarterly conference call is scheduled for the morning of Thursday, February 6, 2014. To be notified of the dates of the future 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 Chief Executive Officer. Darren?

Thanks, Zaheed. Good morning, everyone. Welcome to our third quarter conference call. I'd like to start off by thanking our 54,000 team members for their hard work and commitment to better serve our customers and grow our business. Joining me on the call today is our President, George Sherman, who'll provide you with an update on our 2013 priorities; and Mike Norona, our Chief Financial Officer, who will update you on our financials. As you're aware, 2 weeks ago we announced that we entered into an agreement to acquire General Parts. We are excited about this transaction and the opportunity it presents for both organizations' shareholders and over 70,000 team members. As we said, this combination will position Advance as the largest automotive aftermarket provider of parts, accessories, batteries and maintenance items in North America. Strategically, it provides us with a compelling opportunity to expand our geographical presence, channels of distribution and commercial capabilities to better serve customers and deliver value to shareholders. We anticipate the closing of the transaction late this year or early in 2014. Lastly and importantly, due to the pending close of the transaction, we will limit our comments relative to the General Parts acquisition to the information that we have already shared publicly. Now let's review our third quarter results and the work our team has been doing and will continue to do as we move forward. Our total sales increased 4.3% for the third quarter. And earnings per share increased 17.4%. While we are pleased with our earnings performance, we are not satisfied with our 2% comparable store sales decline. The decline was driven by our DIY business and partially offset by a modest increase in our commercial sales. The sequential decline in our business from the second quarter results was, however, consistent with the slowdown in the overall market growth. The overall market continues to face headwinds from a backdrop of limited consumer spending as the consumer appraisal of the economic conditions continues to affect consumer confidence. Specifically, the market softness we witnessed in July and early August continued through the third quarter. We continue to deal with several unfavorable macro factors, including a very apprehensive consumer that is navigating uncertainty with our government, healthcare reform and a very uneven economic recovery. The result is consumers are only performing repairs that are absolutely necessary to keep their vehicles on the road. Consequently, deferred maintenance remains at record levels. The short-term volatility is evident as the overall aftermarket growth slowed in the third quarter compared to the second quarter. Additionally, looking within Advance's competitive set, we continue to see our competitors intensifying their efforts to drive growth, resulting in more new stores in our footprint. This proliferation of stores and commercial programs in this slow growth period dilutes sales, with over 80% of the new store growth from our competitors occurring in our footprint over the last 12 months. Our comparable store sales shortfall was offset by improvements in our gross margin and disciplined expense control in the quarter as we proactively managed the business and made the necessary adjustments to conform to the market. The team effectively managed our gross profit rate to 50.2%, which was 42 basis points greater than Q3 last year despite continuing headwinds from the full operations of our new Remington distribution facility and the acquisition of BWP, which has a higher mix of commercial sales. Similarly, our diligent expense management resulted in an SG&A rate of 39% in the quarter. The rate improved 49 basis points in the third quarter versus Q3 last year. We saw improvements across numerous areas of the business. Notably, we saw lower administrative and support costs, lower marketing expenses and improved labor productivity while absorbing higher incentive costs versus a year ago. In addition to the consumer macro factors I discussed earlier, we are witnessing structural change within the industry. We continue to see divergence in the growth patterns between DIY and commercial markets. Even looking at current market trends, we see a variance differential. Specifically, the market deceleration from Q2 to Q3 this year was led by a 400 basis point decline in DIY versus a 200 basis point decline in commercial amid the continuing consumer concerns. Looking ahead, we believe the addressable commercial market is $40 billion, which is nearly double the size of the addressable DIY market and growing at 2x the rate of DIY. In response to these macro factors and structural market shifts, we are managing our business forward accordingly. First, we are matching our expenses to the economic conditions within the industry. More specifically, we are managing our cost to the slower sales environment and making pragmatic trade-offs as we balance profitable management of our important DIY business while following the consumer and market trends by continuing to invest in commercial. Second, we continue to evolve our business to the market trends and make specific investments to capitalize on the fundamentals of our industry, which remain positive. I'll speak more about this in a moment. Our strategy over the last 6 years has targeted growth of our commercial business through a series of deliberate stair steps. Our strategic intent hasn't changed. Today, approximately 40% of our business is commercial. We have reached this point today through organic growth, as well as through regional acquisitions, most notably with our AI acquisition, and we are also seeing success early on with BWP. Looking ahead, the pending acquisition of General Parts is another strategic stair step for Advance as we accelerate our growth strategy. Ultimately, these underlying consumer shifts, coupled with industry fundamentals, are the core indicators that point to a stable environment for growth. Specifically, the average age of vehicles has a clip [ph] of 11 years, with approximately 80% of the vehicles over 6 years old. Deferred maintenance has reached record levels. And the increasing complexity of vehicles and parts is prompting customers to entrust complex repairs with independent repair facilities. These customer shifts and fundamentals position Advance to deliver incremental growth while increasing our overall share of the customer's purchases. Despite the near-term sales slowdown, we remain committed to growing our business and profitability through the consistent focus on service leadership and superior availability strategies. We continue to stay the course on our company of one focusing on the fundamentals as our core objective that will guide us for the foreseeable future. For the last number of years, our team was clear that we needed to invest in what the customers wanted most. As a result, we have strong availability, enhanced delivery capabilities, more technology, more talent, and we're in the best position we've ever been in to serve customers. Today, our priorities will continue to include commercial growth, parts availability and improving execution and productivity. George will discuss the work going on in these priorities shortly. Overall, despite challenging sales, I'm encouraged with the progress on the fundamentals and execution as an organization. Great execution is a trademark for all organizations that sustain the balance of structural and motivational initiatives leading to profitable outcomes, sales being just one part of that outcome. Beyond sales, a number of other elements must come together successfully to drive profitable outcomes. And our team has again demonstrated evidence of strong execution through our gross profit rate improvements, in addition to effectively managing costs, which resulted in a 91 basis point improvement in our operating income this quarter. As we head into the fourth quarter, we remain cautious with our sales outlook based on the current market trends. This view of our business for the remainder of the year is reflected in the outlook Mike will discuss a little later. Internally, we continue to remain focused on our strategies and are confident in our team's abilities as we work diligently to drive improved sales outcomes. Looking ahead, I'm excited about the opportunities that lie ahead for our team members, our customers and our shareholders as I look forward to the combination with General Parts, where our execution of the fundamentals that I spoke of earlier will be the cornerstone for success as we go forward. In closing, I'd like to share an example of how growth and focus on the fundamentals brings service as our best part to life. Regional Vice President, Rich Flaherty, is a leader who has developed a store environment where all team members work together to serve our customers no matter what they need, enables partnerships with our field operations and commercial teams that are solutions-oriented. They truly focus on solving customer service issues to ensure we're always exceeding the customers expectations. Rich and his team have worked tirelessly to build an internal bench of high-performance team members at all levels. Rich communicates very effectively through market meetings with his GMs, PPPs to ensure they're all well aware of the keys to driving the business and have in place ways to remove barriers from serving the customers. Rich, I commend you and your leadership, and thank you for the great work your team is producing. I will now turn the call over to George to update you on the work he is leading on our key priorities that support our 2013 objectives.

Thanks, Darren, and good morning, everyone. First, I'd like to thank our over 54,000 team members for their commitment to customer service while making progress on our 2013 priorities during the quarter. Additionally, I'd also like to express my excitement over our pending acquisition of General Parts and the tremendous opportunity that we have before us as a result of this transaction. I'll now provide you with an update of the key priorities that support our 2013 objectives of growth and focus on the fundamentals. First, Commercial Business has been and will continue to be a key priority and the primary growth focus of the company. We continue to intensify our focus on executing against the integrated model strategy comprised of DIY and Commercial. Although the commercial market growth rate is outpacing the DIY market, DIY remains an important part of our business, our profitability and our go-forward strategy. And despite the industry-wide slowdown in traffic, through our focus and solid team effort we saw notable growth in the third quarter in our dollars per transaction. In the quarter, our Commercial Business continued to see improved levels of delivery speed and reliability and increased customer retention and share wallet with national and regional customers. Our national and regional accounts growth approached double digits during the third quarter due to our strength and availability and delivery speed, growth in commercial credit card penetration resulting from our in-source credit program and dedicated focus on strengthening relationships with commercial customers. Overall, we are pleased with our commercial program productivity, generating $700,000 per program all-in between Advance, BWP and Autopart International stores. In addition, we are pleased with the leading e-services offerings that we have for our commercial customers. Our B2B e-commerce business grew roughly 50% in the quarter as we continued to advance our capabilities and improve the breadth of services we offer to our customers. We have also rebranded our motor shop suite of services, highlighting Advance's commitment to providing an innovative and holistic customer experience through continued investment and product development, new technologies and customer service. Second, our work continues toward improvement of in-market availability. A key component of this is our hub store strategy. During the quarter, we added 16 hub stores either through new store openings or the upgrade of existing stores strategically located to operate as hubs. At the end of the quarter, our hub store count was 370, an increase of 42 from the third quarter last year. We also continue to work on our daily replenishment capabilities at our Remington DC. As previously stated, we anticipate 400 stores will be serviced by Remington, with approximately 45% of those stores receiving daily replenishment by the end of fiscal 2013. SKU assortments in stores receiving daily replenishment have increased over 1,600 SKUs from the same time period last year as daily replenishment allows us to carry a larger breadth of inventory. Since we deployed our rapid replenishment capability, performance of stores receiving daily delivery have outpaced our control stores within the region, driven by parts categories. We are still in relatively early stages, and we'll continue to monitor results before we can draw any definitive conclusions. And third, we are working tirelessly on improving business performance through effective execution and enhanced productivity, overlaid by an efficient operating model. We're relentlessly committed to simplifying our operations by reducing tasks and improving process in our stores so our team members have more time to focus on engaging with the customer. This focus has started to yield outcomes as we significantly improved our sales per hour performance during the quarter. Broadly speaking, we continue to simplify our field priorities while strengthening our operational DNA [ph] and reorienting our field teams toward profitable sales outcomes versus being a task-based team. When I refer to outcomes, I'm referring holistically to intensifying our customer experience, our customer satisfaction levels and our sales and operating income performance. We are already starting to see positive steps taken in this direction with our expense control and gross margin improvement contributions over the past several quarters. We're also investing in our team members. We remain on course with DIY and continue moving closer and closer toward a more balanced model between DIY and Commercial. This type of evolution requires both an operational and a cultural shift in order to be successful. We are investing in our field leaders and supporting their individual journey within our dual model environment. We are providing our team members with the training and tools to equip them to deliver on those outcomes I referred to earlier. Notably this year, we've implemented new general manager onboarding and district leader training programs. These programs are geared toward developing our leaders consistently on the fundamental principles of effectively coaching and leading our team members, providing the best experience for our customers and effective management of their stores and districts. Turning to new stores. During the quarter, we added 35 new Advance Auto Parts stores, keeping us on track for our new store opening plan this year. The performance of our 2012 and 2013 classes of stores continue to perform at or above our expectations, primarily driven by a faster ramp-up of Commercial Business than previous classes of stores. We are pleased with the performance of our Autopart International business. The solid third quarter performance was led by strong execution, driving double-digit top line sales growth and diligent expense management resulting in strong bottom line performance. We are well into the formal process of integrating our BWP stores and remain on plan to complete the integration of 124 BWP stores into Advance Auto Parts stores by mid-2014, consistent with the time frame previously communicated at the beginning of the fiscal year. The sales and profitability of the BWP stores are currently exceeding our expectations. Most importantly, during the transition, we are remaining focused on employee retention and customer service. As of the third quarter, we successfully converted or consolidated the first 9 stores. And I've learned a lot from the integration process, and now expect to complete approximately 30% of the stores by year-end. Despite fewer conversions and consolidations than originally anticipated this year, we remain on track to complete the process on time. Collectively, our company priorities remain consistently focused on operations that drive results, led by a focus on delivering on our customer promise and enabled through outstanding and consistent execution. Additionally, looking ahead, we could not be more excited about the future growth opportunities for the great work that our teams are already driving forward and with the pending acquisition of General Parts. To be clear, as we prepare to undertake the integration of General Parts post-close, we will be focused to ensure our integration efforts are closely aligned with our operations while continuing to flawlessly execute and deliver the best customer service throughout the process. I've thoroughly enjoyed my first 6 months with Advance. I look forward to continuing to update you on these important priorities in the future as we continue our focus on commercial to build deeper relationships with our core customers and work diligently to drive and improve sales outcome. Now I'd like to turn the call over to Mike Norona, our Chief Financial Officer.

Thanks, George, and good morning, everyone. I'd like to start by thanking all of our talented team members for their continued efforts to improve our business and serve our customers as we navigated through our third quarter. I would also like to say how excited we are about our future partnership with the General Parts team and the transformational opportunities it presents for value creation. I plan to cover the following topics with you this morning: one, provide some financial highlights for our third quarter of 2013; two, put our third quarter results into context with our expectations and key financial dimensions we use to measure our performance; and three, provide some insights on the remainder of 2013 and how we're thinking about 2014. As we shared on our second quarter earnings call, sales began to soften during the last 6 weeks of the quarter. And that softness continued through the third quarter. We believe this continued softness was primarily as a result of the ongoing challenging macroeconomic environment. While we are disappointed with the negative comp store sales, we are pleased with our operating profit performance. Operating profits grew 13.5% versus third quarter last year and were in line with our expectations, driven by both an increase in the gross profit rate and disciplined expense management, resulting in a 91 basis point increase in our operating income rate to 11.2% for the quarter. We remain focused on influencing the things that are in our direct control and positioning our company for longer-term growth and profitability. While we are pleased with our bottom line results during the quarter, we realize in order to continue our profit expansion, we must improve our sales performance while continuing the disciplined spending we've exhibited over the last 3 quarters. As a result of the weaker consumer demand, our comp store sales decreased 2% compared to the third quarter of last year. Our total sales, however, increased 4.3% to $1.5 billion, driven by the impact of the acquisition of BWP and the net addition of 170 new stores over the past 12 months. Our comp store sales decrease was driven by a decline in the number of transactions, partially offset by an increase in the dollars per transaction. The decline in transactions was primarily in DIY, while the dollars per transaction increased in both DIY and Commercial, with a larger increase in Commercial. Year-to-date, our total sales increased 4.3% to $5.1 billion. And our comp store sales declined 2%. Our gross profit rate in the third quarter was 50.2% versus 49.8% in the third quarter of 2012 or an increase of 42 basis points. The increase was primarily due to higher merchandise margins, driven by a lower product acquisition cost, partially offset by planned increases in supply chain costs associated with the operation of our Remington DC and the impact of BWP sales, which have a lower gross margin rate due to the higher mix of commercial sales. Through the third quarter, our gross profit rate increased 22 basis points to 50.2% from 49.9% over the same period last year. Our SG&A rate of 39% decreased 49 basis points versus third quarter of 2012, primarily driven by lower marketing expense, improved labor productivity and lower administrative and support costs. These were partially offset by onetime costs related to the pending acquisition of General Parts, higher incentive compensation and the impact of increased new store openings. Through the third quarter, our SG&A rate increased 18 basis points to 39% versus 38.8% over the same period last year. All in, our operating income for the third quarter was $170.7 million, which was an increase of 13.5% versus the third quarter of 2012. This result was in line with our expectations and is a testament to our ability to drive gross profit expansion and the team's disciplined focus on expense management despite softer comp store sales performance. Our operating income rate increased 91 basis points to 11.2% in the third quarter. The increased operating income rate came both from Advance stores, as well as our Autopart International business. Our EPS increased 17.4% versus Q3 last year to $1.42 per share and includes $0.02 of transition costs associated with the integration of BWP and $0.04 related to the pending acquisition of General Parts. We still anticipate the transition of BWP will occur over an 18-month period from acquisition, and the associated costs with 2013 to now be in the range of $0.08 to $0.11. Through the third quarter 2013, our operating income dollars increased 4.7% to $569.5 million. And our diluted EPS increased 7.1% to $4.65, including $0.05 of BWP integration costs and $0.04 of costs related to the pending acquisition of General Parts. Free cash flow through the third quarter was $81.1 million, which is down 72.8% over the same period last year, primarily as a result of the acquisition of BWP. Excluding the net impact of BWP acquisition, our free cash flow would have been $251.5 million compared to $298.6 million over the same time period last year, primarily due to higher owned inventory versus last year, offset by lower capital expenditures. Our owned inventory increased 10.4% from Q3 2012. And our accounts payable to inventory ratio is 83.5% versus 83.2% in third quarter of 2012. Our total inventory increased 12.3%, driven by the acquisition of BWP, more new stores and investments in availability. This increase was higher than our expectations due to our lower-than-anticipated sales performance. We expect our inventory growth will be lower by the end of our fourth quarter and continue to be focused on improving our accounts payable to inventory ratio with a continued goal of getting to 100%. At the end of the third quarter, we had roughly $605 million of debt on our balance sheet. And our adjusted debt-to-EBITDAR was 2.2x, which is below our previously stated ceiling of 2.5x. We continue to measure the performance of our business through the financial dimensions of growth, profit and value creation. During the quarter, we continued to accelerate the pace of new store openings, including the net addition of 28 stores. This includes the opening of 35 new Advance stores, offset by the closing of 7 stores, including 5 Autopart International stores and the consolidation of 2 BWP stores into existing Advance stores. At the end of Q3, our total store count was 4,018. Including the acquisition of BWP in Q1, we've increased our net store count by 291 over the last 12 months. We remain on pace to open a total of 170 to 190 new Advance Auto Parts and Autopart International stores this year. In addition to our core store growth, we believe our acquisition of General Parts, which we anticipate closing in late 2013 or early 2014, will accelerate our commercial strategy and position us as a leader in the market, creating a pathway for further growth by opening up new attractive channel opportunities, diversifying and expanding our customer base and enhancing our geographic presence. We expect the acquisition of General Parts to be a significant step to accelerate our commercial growth, which is and will continue to be, the growth strategy for our company. It will also give us an expanded footprint to expand our DIY business. Turning to profit. Advance has been on a mission to improve our profitability through sales growth, gross profit margin expansion and improving our cost structure. Despite softer sales during the quarter, our operating margins increased 91 basis points, driven by gross profit margin improvements, primarily driven by our merchandising teams, resulting in lower acquisition costs and field execution. We also made progress in our expense management, where our field teams improved our labor productivity as measured by our sales per labor hour compared to the third quarter last year. And we continue to lower our administrative and support costs in areas such as professional fees. As a result of a more disciplined approach to expense management, our total SG&A dollars per store decreased to $654,000 per store during the third quarter on a last 12-month basis versus $659,000 during the third quarter of 2012. With respect to value creation, the acquisition of General Parts provides a compelling opportunity to derive shareholder returns through the growth in our business that will drive incremental operating profit, earnings and strong cash flows. Year-to-date, through the third quarter, we have deployed over $317 million of capital, including investing approximately $180 million in our acquisition of BWP and returning approximately $79 million to shareholders via share repurchases. At the end of the quarter, our average diluted share count was 73.1 million shares. Our disciplined approach to capital is reflected in our return on invested capital of 18.6%. For the quarter, our ROIC decreased 38 basis points versus third quarter last year as a result of our increased invested capital due to the acquisition of BWP, the in-sourcing of our commercial credit program and the accelerated pace of our new store openings. Turning to the balance of the year. Given current market conditions, we expect the softness in the sales environment to continue in Q4. As a reminder, Q4 is our lowest volume and most volatile quarter as we compete with holiday shopping season and seasonally lower demand for parts. As a result, we are maintaining a cautious outlook for Q4 sales and now anticipate our annual comparable store sales will be in the low negative single-digits for 2013. We continue to expect that our gross profit rate will increase modestly for the full year. And we will continue to adjust our costs appropriately, given our sales trends to deliver on our profit expectations. We also expect to have headwinds in Q4 with incentive compensation, given our profit growth this year as we anniversary lower incentive compensation in Q4 last year. We expect our SG&A per store to be approximately flat, inclusive of BWP integration costs and all General Parts onetime costs incurred through the third quarter. Given what we see for the fourth quarter, we are maintaining our annual 2013 EPS outlook to be in the range of $5.30 to $5.45, inclusive of BWP integration costs, but excluding all onetime costs incurred in the fourth quarter related to the General Parts acquisition. As we look to 2014, driving top line growth and bottom line profit will continue to be the focus as we begin integrating General Parts. We remain cautious in the short term as our customers continue to adjust to a difficult macroeconomic environment. We expect that longer-term industry dynamics to remain favorable as a result of the continued increase in the average age of vehicles and the deferred maintenance remains at record levels. We expect our top line growth to be driven by stronger commercial comps, improved execution, new stores and continued improvements in our availability. We also expect growth from the additional scale, new channels and capabilities from our pending acquisition of General Parts. We expect to continue to improve our profitability through our existing work to improve our gross profit rate and cost structure and through the realization of the synergies from the pending General Parts acquisition. A key success factor will be to ensure we remain focused on our current day-to-day business operations, delivering on our company objectives and executing against our customer promise, which we are confident we will do. We will provide a more detailed 2014 annual outlook on our fourth quarter earnings call. As a reminder, in anticipation of the pending closure of the General Parts transaction, our prepared remarks and any subsequent commentary related to the acquisition will be strictly limited to the transaction materials Advance has already shared. In closing, we are committed to our strategies in Commercial and availability and are focused on improving our sales performance while continuing to improve our profitability and strengthening our returns to continue to drive shareholder value. We also want to thank our 54,000 team members who lead us every day with their relentless focus on service and commitment to operational excellence and execution, which are key ingredients to delivering on our goals. Operator, we are now ready for questions.

[Operator Instructions] The first question today is from Simeon Gutman with Credit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: So Mike, you maybe touched on a couple of areas of SG&A where you're finding some savings. From a high level, can you talk about the balance between corporate and the stores? And do you think any of the comp decel is attributable to lower spending? Or as Darren mentioned, this quarter was more just a function of the environment?

Yes. So maybe I'll start, and I'm going to pass you over to George. So if you remember, in the beginning, one of the things that we've been talking about, and we're pleased with is, we needed -- about [ph] the profitability of our model. And at the beginning of this year, we said that, that would come from 3 main areas: improved marketing effectiveness, labor productivity and then our store and administrative costs. And we're pleased with the progress we've made in all those categories. I'm not going to break it out in terms of the pieces just because we don't typically give that kind of information. But we're pleased with the labor productivity. We've had record productivity the last 2 quarters from our field. And that's a credit to our team members that are serving our customers and are doing it in a more effective and efficient way. The SG&A that we're taking out of -- one of the things that we're on a mission on is taking costs out that aren't giving us a good return. And when you take out things like professional services and other costs -- another big driver of our costs, and I think we mentioned it in the release is last year we in-sourced our credit program. We're seeing the benefits coming through our credit card fees, lower credit card fees. We're doing that. So the whole idea is to take costs out furthest away from the customer or improved productivity and not to impact sales. But I'll pass it over to George as to the impacts to sales.

All right. I think it's very much what Mike said. We try wherever possible to go after noncustomer-facing activities to make expense adjustments. We're always aware and keen to the possibilities that we may do something that could affect sales. We wish that it was more surgical in taking costs out of the operation. Sometimes, it does. And we're quick to correct those. I think we're also quick to recognize shifts in our business. So if you look at where we're seeing progress on the sales -- where we're seeing progress in the market, we are committed to a consistent and high level of service to our Commercial customers. And sometimes that takes the form of drivers in a store, but we look at it. We look at the results. We are always open to the possibility that we could do something that affects our sales. And we react quickly. But our bias is to go toward noncustomer-facing activities, keep it as far away from the customer service model as possible. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And then a follow-up regarding the spending backdrop. We get some of the issues that are happening, I guess, in DIY and some of the fleet things that are happening in DIFM. But there is a good amount of deferred maintenance, as Darren mentioned. Gas prices have come in recently. As we turn the year, we'll start to cycle some payroll tax cuts. So is there any reason to be a little more upbeat after you get through this whatever government adjustment process, any reason to be more upbeat as we get into early part of next year?

Yes. Simeon, this is Darren. You hit on a couple. I think the anniversarying of the payroll tax holiday, the cost of it, the absence of it is certainly one. And you know what, gas prices moving towards $3.25 a gallon nationally is obviously another one that should be a tailwind versus a headwind. I think the government, whether it's healthcare or the shutdown, I think what's happening, and we can see it in the mix of our business, is that consumers are clearly squeezing those dollars a little harder. And they're just making choices around what must get done versus what's nice to get done. And so that being said, when they have a few more dollars in their pocket, and those 2 events will help them for sure, that is a reason to be a little more upbeat. I think the other reason is if you're stretching it out, I think the number jumped nearly $6 billion this year in deferred maintenance. I suspect when the number comes out again in another 4 months, we'll find that -- I don't know that it's jumped another $6 billion, but I bet it's jumped another few billion dollars in terms of what's out there. And that will put them into a mode, if it's anything like we saw in '09, that's when we saw a big relief of that deferred maintenance number. So I don't think it's a question of if. I do believe it's a question of when. And that's really going to come down when the consumers prioritize more of the spending and some of the preventative maintenance spending that really helped fuel those years of higher growth.

The next question is from Matt Fassler with Goldman Sachs.

My primary question relates to expenses. I just wanted to take a step back and get a sense of how you think about this philosophically as you plan your SG&A. Are the cost cuts that you're implementing a function of really response to the competitive backdrop -- not competitive backdrop, I'm sorry, the macro backdrop, or it is more a function of a benchmarking exercise where you get a sense of where you stand versus your competitors? I asked the question because you index [ph] quite well from a sales productivity perspective, less so from an operating margin perspective. So is this an attempt in a sense to rebalance those metrics to get to a higher level of profit dollars with a lower cost structure and a willingness to absorb a sales hit? Or am I reading too much into that?

Matt, it's both. So certainly, at the front end of the year, probably about the first quarter, we were not as bullish on the overall year in terms of sales trends. And early on, we told -- I think we told the greater world that we just -- we're going to be more conservative on the sales trends. And we're going to match our expenses to those sales trends. And for a number of years, we've said, look, we know our SG&A per store is high. And we have taken steps net SG&A per store not to artificially hit an artificial target. But what I would say is step through where we see productivity opportunities. And those productivity opportunities aren't in every store. There are many stores that the productivity, we're not only happy with, we're thrilled with. There are other places in every business through outlier management where you go in and you're just looking at store standards and productivity and targeting the efforts there. And it's not just about a store because I think Mike talked about in marketing, too, you target return on advertising. It's not just there. You look at IT. You look at different places, whether it's a percent of sales or other measure. And it doesn't happen overnight. It really is somewhat of a building towards the cultural piece of that, but really executing against some very specific, I would say, more fact-based productivity measures that you're looking for. And it's a balance. And certainly, we have edited some sales as a result of that. A simple way to think about it is that I couldn't be more thrilled this year that we're growing our large bay and our national accounts. And I'm certain that we are giving up some sales in our non-focused customers that are 10 miles away from a store. That expense trade-off is actually good for 3 reasons: one, our service levels just got better for our larger and more important accounts; two, we weren't servicing those accounts 10 miles from the store in a consistent way that was going to build our brand; and three, what it allows us to do at a store level is effectively plan, as well as the sales team, plan and focus as to where we're spending our time.

And Matt, I do want to mention one other thing. You're also looking at net SG&A figures. Included in those SG&A figures, Darren's exactly right. For many years, we were criticized with our high cost structure. And it was very planful. We did -- I think we did the work first before we started pulling the costs out. And as Darren said, we've adjusted the variable to the trends in the business. And we've actually strategically made moves. But included in that SG&A, we're also investing in new stores. We're also investing in availability. So these are net numbers that you're looking at as well. So the offset to some of that SG&A -- because people talk about the SG&A cuts that we're making. And our SG&A per store is coming down. But we're also netting in those numbers is we're opening more stores this year than we did last year. And we're improving our availability, too.

So understanding that there is a game plan behind this P&L geography, as we think about the next couple of years, and let's forget about the existence of the deal, how far along are you in this process of cost cuts, with some potential sales hit [ph] associated with it? Are we halfway there if you think time-wise or level-wise?

Well, it's too early, Matt, to talk about what will happen with respect to the acquisition. It's just too early. We haven't done that work yet. I can tell you the things that we'll continue to talk about as a company, even when we put these 2 organizations together is we're always going to want to take costs out furthest away from the customer that aren't giving us good return. So that will always be a plan of ours. We'll also always want to improve our productivity. So those 2 things. And George, I don't know if...

Yes, I would add to that. I think while we continue to look for opportunities to sharpen our cost base, there is no question that we're not going to put a cap on productivity. We think that building a productivity culture and a sales culture within our organization is very important. We've spent a lot of time and put a lot of focus on that this year to really get our teams focused on driving sales per hour and becoming more and more productive at every level.

And finally, Mike, you have, from time to time, given us a target for growth in SG&A per store as part of the guidance thought process on the calls. Do you care to do that today for the fiscal year?

No, we won't. I'll give you more details when we do our Q4 call for next year. We do that. We don't look out further than that. So we'll give you that. I will say -- we said it on the call that we're expecting our SG&A per store to be roughly flattish this year. And part of that we built in, and we said it in our remarks. We're going to continue our progress on our cost work. But when we hit Q4, we do have some headwinds this year that we didn't have. So we're going to be anniversarying a lower incentive comp last year. And as you remember, a lot of people in the company didn't get bonuses last year. With the profit improvements we've made this year, there's going to be more incentive. So that's probably the biggest impact that we'll see in Q4. But we're expecting it for the year to be roughly flattish.

The next question is from Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Mike, I guess just continuing on this theme. In the quarter, operating margins were up 90 basis points. But if you were to add back in the deal expenses with GPI, I guess you're up 120 bps. Thinking back to the Investor Day last spring and your goal of 200 basis points of improvement over a 3-year period, how much further ahead are you of that goal at this point than what you were talking about last March and April? And are you now thinking maybe that 200 basis points upside could be conservative? Again, that's excluding the transaction.

No. Dan, I don't know if we're ahead. I think we're pleased. So I think that the numbers you're talking about is -- so we leveraged SG&A 49 basis points. Well, that includes the deal costs. So when you take those deal costs into account, I think that if you just do the math, I think that's 84 basis point of leverage we would have in SG&A. And then that includes BWP costs. So I think that's how you're getting through the numbers. I think in a bigger frame, I think we're pleased with the margin improvements we've made. We're expecting modest this year. We're pleased with the SG&A improvements. When we set the 12% goal, quite frankly, too, we also planned that the comp would be better. So I think, for us, where we're focused on is while managing our costs is the right thing, we've always said that in order to get to 12%, it was 3 pieces: it was growth and it was profit through SG&A and margin. And I think we're pleased with the SG&A. I think we're pleased with the margin. And I think as George and Darren said, we've got some work to do on the sales. And there's parts of our business -- Darren gave a great story that's happening in Boston. We've got pockets of the business that are doing well. And I think where we're focused is getting that top line going. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Okay. And this is a follow-up. Darren, you had noted that 80% of the stores opened from your competitors are going into your territory. Unfortunately, that's not going to change based on where O'Reilly is indicating. They're going to open all these stores in Florida and up in the northeast. What kind of competitive response can Advance make? I know you're not going to compete on price. But what kind of competitive response can you make to help protect your market share in those regions?

Well, the most important thing you can do in those regions, Dan, is take care of your customers and take care of your team. And so in certain of those markets, there's tactical things that we'll do to protect our customers and tactical things that we'll do in terms of growing our business. I think in the DIY business, we've seen this in other industries, when 83% of the customers make their choice around DIY based on who's closest to their home, you're balancing the impact of, what I'll say, is just core human behavior. And you're trying to offset that with your team and how you're treating your customers. I mean, as we look out and without getting into things we can't talk about in terms of General Parts, we see enormous opportunity rolling Advance beyond our traditional footprint. And we talked about this a lot in terms of 88% of those stores are east of the Mississippi. We certainly see General Parts giving us a multipronged approach to growing our business through WORLDPAC, which we think is just an extraordinarily special model and led by a great team. And we see the opportunity with the Advance brand. And more recently, as we've spent some time with the independents meeting and greeting them, we see that as an opportunity for growth, too. And there's a lot of growth outside of our footprint that is now -- that will be available to us once we complete the process.

The next question is from Greg Melich with ISI Group.

I wanted to follow up on the productivity and sales culture that George mentioned trying to drive in the organization. As you think about getting that balance right, would you consider, on the DIY side, doing things like loyalty programs like O'Reilly's doing to maybe reinvest some of that margin or productivity gains into the selling side of that equation? Then I had a follow-up.

Yes. I don't think we discount any possibilities as to how we would serve our DIY customer. I think when you talk about the sales and productivity culture as it applies to DIY, we've been very focused on training our teams, getting more automotive systems training in place, getting more training and reporting around how the entire project our job is sold into the store and become very focused on when our traffic patterns are at their highest and putting task management in place and move it away from those peak periods of the day. So we won't put any limits on what we would do in terms of serving that customer. But we're certainly not in any way, shape or manner, walking away from DIY. It's a huge part of our business.

Okay, great. And then I just wanted to follow up. In the prepared comments, I think, Darren, you mentioned that sequentially, DIY, you think, was 400 bps weaker and do-it-for-me, 200. Was that for you guys or the industry?

That was the industry, Greg. So all we're doing -- we don't get granular industry data anymore. But we do get it at a pretty high level from NPD just quarter-to-quarter. And you could just see a slowdown Q2 to Q3. And you shouldn't read into it, it went negative, but it was pretty pronounced in DIY. And I think as our competitors have talked about earlier in the quarter, I think we just saw part of that malaise come through, part of it governmental and part of it for different reasons from the consumer.

And with merchandising margin being driven with the reduced sourcing costs, imagine there's some deflation there. Was there any LIFO? Or are we seeing that also show up on the top line where there's actually deflation now on the top line?

Yes. So I'll talk about LIFO, and then Charles can talk about it then. So LIFO, if you look at just the LIFO line, we had a little bit of income this year anniversarying against more income last year. So LIFO was actually a headwind for us in the quarter. But just looking at the LIFO line is the wrong way to look at it. You've got to look at did we change mix, did we adjust prices? And when you put that all together, the inflation, deflation had minimal impact in the quarter. Charles?

Yes. And I think the other thing is a sourcing. We work across our whole vendor structure to continue to work on improving acquisition costs and improve our overall gross margin. So it doesn't mean that we necessarily would deflate at top line through price positioning. And it's very rational pricing in the marketplace. So you're seeing that benefit across a wide array of our vendor structure in terms of how we're driving the margin equation.

Our final question today is from Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: A little follow-up on George's comment there on sourcing, and I guess lower product acquisition costs came up. Is it same product at a lower price or are you shifting the product mix? Is there more private label products coming into this -- into the category that's driving the gross margin up? And I guess to some extent, is the higher owned inventory also having an impact? Are you getting better pricing in exchange for less aggressive payable terms?

So I'll answer the first question first. We've said consistently in the last 3 years that our investment in our global-sourcing capabilities has continued to drive benefit. And that's driving through a higher percent of private label penetration. So the answer to your question is yes. In terms of the inventory builds, we're making those strategic investments in our markets. If you look at our Remington DC and you look at our 6x [ph] delivery, we're putting more product closer to the customer to make sure that we drive a better availability. We're not trading off terms for price. And we continue to maintain that discipline as you see in our AP [ph] ratio continuing to improve over the last 3 years. Bret David Jordan - BB&T Capital Markets, Research Division: And then I guess one other question on the margin. The SG&A benefit from some of the lower marketing expenses, was there inefficient marketing spend? I guess as you talk about new competitors coming into your footprint or increasing competition in your footprint, does marketing need to come back up to some extent? Or was it just inefficiency you were able to take out and you can continue to run marketing at these levels despite increasing competition?

Yes. I think, Bret, there's a couple pieces. Charles, do you want to provide color? I think when we stood back and looked at our marketing, we had a broad range of vehicles last year. I think what we did is we stood back and looked at those multiple vehicles, whether it was direct marketing through the mail. Certainly, we're all spending a lot more online than we have in years past. And in radio, and many of those have different timelines in terms of the returns. What we could see is that ability to consolidate under fewer vehicles this year. And when we made that consolidation, we really made it against a view of which one of them are future facing, call it, the Internet. Which one of them quite frankly are we renting the business for short periods of time and which ones of those do we have to be more consistent over time. And we added it against that lens, and really are staying the course in that approach to the business. And I'd say, years before that, you're just -- you're probing the wall a little bit in terms of how the consumer is reacting. And as you better understand what they're reacting to in how things are changing, you're narrowing the mix based against an effectiveness measure, not just against a total dollars spent. Would you add anything, Charles? George?

No. I think you said it perfectly.

That concludes the question-and-answer session. I would now like to turn the call over to Zaheed Mawani for closing comments.

Thank you, Wendy, and thanks to our audience for participating in our third quarter earnings conference call. If you have additional questions, please call me at (952) 715-5097. Reporters, please contact Shelly Whitaker at (540) 561-8452. That concludes our call.

Thank you. That concludes our call today. You may now disconnect. Thank you for joining us.