O'Reilly Automotive, Inc. (ORLY) Q3 2007 Earnings Report, Transcript and Summary

Good morning, everyone. My name is Jacob, and I'll be your conference operator today. At this time, I'd now like to welcome everyone to today's 2007 Third Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer period. [Operator Instructions]. As a reminder, everyone, please limit your questions to one question only and one follow-up question. At this time, I would now like to turn the call over to Tom McFall, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you, Jacob. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, I'd like to read a brief statement. The Company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contain within this press release that are not historical fact, are forward-looking statements, such as statements discussing among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions; they are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risk associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors section of the Company's Form 10-K for the year ended December 31, 2006 for more details. At this time, I would like to introduce Greg Henslee.

Thanks Tom. Good morning, everyone, and welcome to our third quarter 2007 conference call. Participating on the call with me this morning is Ted Wise, our Chief Operating Officer; and Tom McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman is also present but won't be participating in the prepared comments. Considering the continuation of the challenging economic environment we've experienced so far this year, we are very pleased with our third quarter and year-to-date performance. Our team continues to focus on the fundamentals of providing highest levels of customer service to both our professional customers and our do-it-yourself customers, and we are very encouraged with the steadiness of our comparable store sales growth throughout the third quarter resulting in a 4.3% increase. As discussed on our second quarter Analyst Call, business started picking up coming into the third quarter and comparable store sales remain steady at a healthy pace through out this period. This stronger pace of business has continued to this point in the fourth quarter. There is no question that our team is very focused on gaining market share in our newer markets as well as defending and growing our share of business in some of our older markets. We are extremely proud of the job our team has done, as we continue to grow the Company at a rapid pace, and I want to thank all members of team O'Reilly for all their efforts in insuring the continued success of our business and for the great levels of customer service we work so hard to provide. While 4.3% comparable store sales for the quarter is a solid improvement over second quarter, we continue to feel that many of our core customers remained very challenged economically. Primarily due to the effects of higher energy costs resulting in inflationary pressures which were driving many customers to differ as much vehicle maintenance as they reasonable can. Our business is very resilient to the consideration of deferment, however, we continue to see the effects of the challenges many consumers face in some of our more discretionary categories as well as in some of our premium lines, where economically stressed customers might opt for an entry-level product or a lower price product. Other evidence of deferment comes from the professional side of our business. As we visit our customer shop, we have heard many of the shop managers make comments about customers that are delaying repairs that can be deferred and in many cases opting to do only the bare minimum to keep their vehicle on the road. Obviously, these repairs can't be deferred forever. And over time, we continue to expect positive future results as we benefit from the release of this pent-up demand. Over the past couple of weeks, we completed our divisional strategic planning meetings which consist of asking all our divisional Vice Presidents, our Regional Managers and our District Managers for their input in determining any opportunities we may have to improve the business in the coming year. We received a lot of solid input from our leaders in the field and this information is the basis for putting together our Company's strategic plans for the upcoming year. Like years passed, our focus continues to be on improving execution of the basic fundamentals which include hiring the right people for our new store locations and training them to provide the highest level of customer service in our business and to live the O'Reilly culture which is key to our success. Continuing to focus on being the dominant supplier and partner to our professional customers, while at the same time take advantage of the opportunity we feel we have to grow our retail market share. Continuing focus on improving the systems and processes we used to set our prices and to deploy inventory in each of our distribution centers and store locations. And levering technology to improve productivity and access the information across the Company. In addition to continuing our refinement as the basic fundamental of growing our business over the next year, our plan for 2008 calls for the addition of 205 new store locations, as well as the construction and year-end opening of our fifteenth distribution center which will be located in Lubbock, Texas and will serve the West Texas market as well as expansion into the Mexico. Now on to a little more detail about our third quarter performance. Our gross margin for the quarter came in at 44.4% of sales compared to 44.1% last year, a 30 basis point improvement in line with our gross margin guidance of 44% to 44.4%. We continue to attribute our gross margin improvements over the past few quarters to a combination of good, solid management of our distribution cost as well as our ongoing category management efforts. We are very diligent in managing our selling prices and looking for ways to improve our gross margin yet maintain our competitive position as we work to gain market share in both our older, more established market, and our newer expansion markets. We also continue to explore more direct importing of faster moving products which over time will have a positive effect on our acquisition cost. Competitor pricing on both the retail and wholesale sides of our business remains consistent with no significant changes other than occasional promotion and price changes due mainly to raw material costs. We've not seen any significant strategy changes in the marketplace over the past quarter. In distribution and logistics, we continue to be very pleased with the technology investments we have made in the recent past. Things like voice activated picking and improved slotting analysis are improving our productivity in material handling while at the same time improving our shipping accuracy. We are also very pleased with the onboard computer systems, we have installed in our over-the-road trucks. These devices allow us to monitor driving habits and coach our drivers on ways to improve fuel mileage. We monitor simple things like idle times, shift patterns, RPMs and speed. These systems have allowed us to improve the average fuel usage of our over-the-road trucks from 6.3 miles per gallon a year ago to 6.8 miles per gallon today, mitigating a meaningful portion of the per gallon fuel cost increases we have experienced. Operating expenses for the quarter increased 40 basis points to 31.9% of sales from 31.5% last year. This increase can be attributed to three primary factors. First, we continue to experience delays in construction and permitting of new stores, which has pushed several of our new store openings that were planned for the third quarter into the fourth quarter. In many cases, we've carried more pre-opening payroll for these delayed stores than we would have liked. It's very important that we make sure our stores are staffed with trained and qualified team members at opening and we are very focused on our new store opening schedule and are working to better manage these delays. Second; as we've mentioned on previous conference calls, we are spending a little more on retail marketing and advertising this year. Year-over-year we are planning for an approximate 15 basis point increase in advertising and marketing spend. Then third, like every company that uses stock options as an incentive, we're expensing stock option grants as payroll as part of the required accounting changes. Operating margin came in at 12.5% compared to the 12.6% last year and net margin was 8%, even with last year. During the quarter, we opened an additional 43 new stores bringing our new store openings for the year to 134 behind where we plan to be at this point of the year due to the construction and permitting delays I mentioned earlier. We plan to make up the difference this quarter and are on plan to complete the opening of 190 new stores this year as was previously announced. We ended the quarter with 1,774 stores bringing our inventory investment to $857 million, a 5.1% increase over third quarter of last year supported by a 10.8% increase in sales. We continue to be very pleased with our ability to systematically put what we consider to be the right inventory in each of our distribution centers and stores. These inventories are completely customized to the markets they serve and we feel the effectiveness of these systems are reflected in our continued solid comparable store sales performance and in our ability to incrementally grow sales at a rate stronger than we're growing our inventory investment. Inventory turnover remained equal compared to last year at 1.6 times on a total asset basis and turnover, net of payables, improved to 3 times from 2.8 times third quarter last year due to our ongoing efforts to manage strong relationships with our vendors and to negotiate the best possible payment terms. Our accounts payable, as a percent of inventory, increased 490 basis points from 41.9% last year to 46.8% this year. To summarize, we're very encouraged by our performance in the third quarter. We'd certainly like to have a little stronger comparable store sale but feel we are fairing very well in a pretty tough environment. While we don't disclose same-store sales by business category, I will say that on a comparable store basis both sides of our business, professional and DIY, grew nicely in the third quarter. We continue to feel that our dual market strategy is an ideal business plan for our industry and we continue to look for ways to improve our execution of this plan. As we move into more and more markets, we realize the effectiveness of our ability to be a core supplier to professional customers in each market as we work to gain retail market share. Obviously, our roots are in the professional side of the business and that heritage is reflected throughout our company from our distribution networks to the national preferred brands we carry which are the brands of choice among many professional installers and are a great sale up opportunity for the serious do-it-yourselfers that want to do a professional quality job. This year we are celebrating our 50th anniversary, and some of the brands that we carry are the brands we carried since day one. As I mentioned before, we continue to believe that the economic condition of the average household is driving many consumers to defer some of the maintenance items that can be deferred and we will benefit from that pent-up demand in the future. We are currently on a trend of several solid weeks of healthy comparable store sales growth and want to mention that because of our calendar quarter reporting period, our same-store sales in the third quarter included one additional Sunday than last year's third quarter. This additional Sunday had an approximate 50 basis point negative effect on comps for the quarter, so on an equal day of week comparison we would have reported comparable store sales in the high 4% range. Considering that we will be short one Sunday in the fourth quarter compared to last year, making up for the extra Sunday we had in the third quarter combined with the solid weekly same-store sales trend we are on, we are raising our comparable store sales guidance for the fourth quarter to 4% to 6%. Again, we want to thank every member of team O'Reilly for the great job they did in the third quarter and for their commitment to providing our customers with the highest levels of service in our business. I will now turn the call over to Ted Wise our Chief Operating Officer.

Thanks, Greg, and good morning, everyone. As Greg mentioned, we installed 43 stores last quarter bringing the total to 134 year-to-date. This is approximately 8 stores short of where we would like to have been at the end of the third quarter. The good news, however, is we are back on schedule and we will be installing another 56 stores to reach our goal of 109 stores for the year. This year's development schedule has been challenging due to both weather and permitting delays, and we anticipated that construction in the Northern State would be more difficult from a weather standpoint. But we've also found out that we're facing longer review and permitting process time with both cities and the DoT, or the Department of Transportation. Development along the East Coast states also have some of these same issues but to somewhat of a lesser degree. This year has been a learning curve in this area, working with these timing issues which has prompted us to make adjustments in our staffing and planning processes, and help us realize that we will need to increase the number of properties in the pipeline along with making improvements and adjustments in dealing with the timing and permitting and constructions cycles we are faced with. With that being said, we are comfortable establishing a goal of 205 new stores for next year. I would also like to mention that we relocated 14 existing stores bringing us to a total of 30 stores relocated year-to-date and we have another 8 relocations for a balance of 38 by year-end which I believe is a record number of relocations in a year and has certainly been a big part of our growth focus this year. A majority of these were in the Midwest store group and as anticipated we are seeing good sales results tied to these relocations. Now, I will give you just a little bit more detail on our store growth by State. Texas again was a key state with 16 new stores that included our first 2 stores in the El Paso market area, which we feel is going to be a great multi-store market for us. As announced, we are in the process of building the new DC and Lobby in Texas that will support the additional stores in El Paso and in West Texas as well New Mexico. This DC will start-out by servicing a number of existing stores in West Texas that's now being handled by our Dallas and Oklahoma DC that will free up needed space and these DC's for additional growth in those market areas as well as provide some nice freight savings for these stores transferred to the new Lobbying DC that's quite a bit closer. We installed nine new stores in Georgia. In the Ohio Valley, out of our ND DC we added seven stores in the, ND, Indiana and 6 stores in Ohio. And Minnesota also received 6 new stores that are now being serviced out of our recently relocated Minneapolis DC. The balance of the store expansion was spread out in 12 states across the company. Now, rounding out the third quarter store development activity, we also renovated 20 stores and completed installation of our new interior dZˇcor package in another 27 stores. All-in-all an extremely busy schedule for our development installation teams, and we appreciate the confidence, the commitment and the hard work it takes to accomplish this level of expansion in projects... number of projects. Now for just a brief overview of our marketing efforts last quarter, we were major sponsors in 30 motor sports events last quarter. Just to mention a few of the larger events, the Ohio, the O'Reilly Thunder Valley NHRA in Bristol, Tennessee; the NASCAR Truck Busch Race at the O'Reilly Raceway Park in Indianapolis, the O'Reilly 200 NASCAR Truck Race at Bristol, Tennessee; the O'Reilly Mid-South NHRA National in Memphis, Tennessee; the O'Reilly NHRA Fall Nationals, in Dallas; and the O'Reilly Qualifying Days for the NASCAR Kansas race. We continue to see our motor-sports marketing, both at the national level as well as the grass roots and local level as a great investment in building the O'Reilly brand with a seriously DIY customer as well as our professional installers. In the area of Hispanic marketing last quarter, O'Reilly was major event sponsors at 12 regional Hispanic festival and fairs that drew an attendance of over 500,000 people. On the installer side or the do-it-for-me side of our business, our professional sales teams continue to build relationships in the field based on our superior inventory coverage and level, our competitive pricing and overall higher service level. Our certified auto repair marketing program for our installers that has now grown to 1,850 participants in approximately two years, and we continue to sign up around 50 new shops every month. On the store technology, our new infinity point-of-sale system has now been installed in over half of our stores and the balance to be completed by the end of the year. Right track training learning management system is fully implemented in the stores with all of our existing training programs converted to computer-based modules on our team. And many new modules are now under-development and will be rolling out to our store team members. Store scheduling has been well received as important tool for our managers to better plan and staff retail sales traffic. Our management team is more focused then ever for, at providing the outstanding service level that will grow our DIY retail market share, not only in existing expansion markets, but as we enter the new expansion markets. Last quarter the 4.3 same-store sale on top of 4.3 sales increase year-to-date is a result of our dual market strategy and the outstanding job that our team is doing, providing the service level to both the DIY customer and the professional customer. I want to turn it over to Tom now for more comments.

Thanks Ted. Now to move on to the numbers. Sales were up 10.8% to $652 million for the quarter with comparable store sales of 4.3% for stores opened greater than 12 month versus 3.6% for the third quarter of 2006. Year-to-date sales increased 11.2% to $1.92 billion, and the comparable store-sales 4.3% versus 3.6% in the prior year. Sales to independent jobbers for the third quarter of $12.4 million decreased 0.8% from the prior year. Gross profit was 44.4% of sales for the quarter versus 44.1% in the prior year. Year-to-date gross profit was 44.3% of sales versus 43.9% in the prior year. Improvement was primarily due to improved product mix and distribution efficiencies. SG&A for the quarter was 31.9% of sales versus 31.5% in the prior year. The de-leverage was a result of higher pre-openings, store labor expense as result of delays in new store opening, higher advertising costs, increased stock option expense and professional fees relating to tax planning with the resulting savings appearing on the income tax line. For the year SG&A was 31.7% of sales versus 31.3% in the prior year. The increase as a percent of sales was primarily attributed to higher advertising costs in industry... increased stock option expense. Operating income for the quarter was 12.5% of sales versus 12.6% in the prior year. Year-to-date operating income was 12.6% of sales versus 12.7% in the prior year. The tax provision was 36.4% of pre-tax income for the quarter versus 36.5% in the prior year. Both years were positively impacted by changes in contingent tax reserves. The year-to-date tax rate was 36.9% of pre-tax income for both 2007 and 2006. Net income for the quarter was $53.1 million versus $47.9 million in the prior year, an increase of 10.9%. For both years net income was 8% of sales. Year-to-date net income was a $153 million versus a $138 million in the prior year. Year-to-date net income in both years was again 8% of sales. Diluted earnings per share for the quarter was $0.46 versus $0.42 in the prior year on a 116.3 million shares which is an increased of 9.5%. Year-to-date earnings per share was a $1.32 versus a $1.20 in the prior year, a 10% increase. Moving on to the balance sheet, inventory was $857 million, up $42 million from September 2006. This represents a 5% increase in inventory over last year versus an 11% increase in store count over the same period. Total assets were $2.3 billion, a $316 million increase from September 2006. The increase was due to increased cash-on-hand of $69 million and growth in fixed asset and inventory related to store distribution center growth. Accounts payable of $401 million was an increase of $60 million over September 2006. AP to inventory of 46.8%, increase from 41.9% at September 2006. The AP to inventory ratio was positively impacted by better vendor terms and improved leverage of inventory at the store level and the newer DCs. Debt levels were $101 million at the end of the third quarter for this year and last year. Debt-to-capital was 6.1% with debt-to-EBITDA up 0.3 times. Short-term debt increased $25 million over prior year related to our private placement note that is due May 2008. EBITDA for the quarter was $105 million, 15.9% of sales, year-to-date EBITDA of $302 million is an increase of 12.4% over the first three quarters of 2006. Other performance measures were return on equity of 13.5% at the end of the quarter, returns on assets 9.2% and return on invested capital 12.9%. For some other financial information, during the third quarter the reserve for LIFO decreased $5.2 million. Depreciation was $20.8 million for the quarter, a $57 million year-to-date. Capital expenditures for the quarter were $79 million and $220 million year-to-date. Interest expense was $1 million for the quarter and $2.6 million year-to-date. For the quarter, cash flow from operating activities was $90 million with a positive free cash flow of $11 million. For the year, cash flow from operating activities was $282 million, which is a 76% increase over the prior year. Free cash flow year-to-date was $62 million, an increase of $77 million over the prior year. This year's strong free cash flow performance has been the result of improved EBITDA, better average per store inventory levels, and increases in payable terms offset in part by higher capital expenditures. Now for guidance; as Greg mentioned earlier, our fourth quarter guidance for comp store sales is 4% to 6% and diluted earnings per share is $0.37 to $0.41 per share versus $0.35 per share in the fourth quarter of 2006. For our full year guidance, capital expenditures, $270 million to $280 million; interest expenses of approximately $3.5 million for the year; depreciation of $78 million to $80 million for the year; the guidance for tax rate is 36.9% to 37.1% of pre-tax income; free cash flow should be $40 million to $50 million for the year; gross margin of 44.3% to 44.4% of sales; revenues of $2.5 billion to $2.55 billion; and comp store sales of 4% to 5%; and diluted earnings per share guidance is $1.69 to $1.73 with stock options. At this time, I would like to ask Jacob, the operator, to come back. And we'll be happy to answer your questions. Jacob? Question And Answer

Thank you, sir. [Operator Instructions]. First question or comment comes from Bill Sims with Citigroup.

Thank you very much. Good morning.

Good morning.

As early stated that customer remains economically challenged and we have seen that throughout retail, but at the same time you said are seeing stronger pace of business continuing to fourth quarter. Can you help us all understand what do you see and whether it's from a geographic prospective, product category perspective, put us in the heads of your consumer and why do you think we are seeing the pick-up in market share gains, etcetera.

Well, as we said, coming out of the second quarter, business had started out stronger in the third quarter and its been pretty amazingly consistent with the exception of the one months that we had, the extra Sunday, of course, our comparable store-sales for that month were a little lower than what they had been the other two months. But week-by-week comps have been strong and continued strong, to some degree... and I hate to think that 4.3% comps would be the release of any pent-up demand, and I don't feel that way, but I do think that some of the repairs that have delayed over a period of time, they had to be made, and while consumers are still very economically stressed there is just some things you can't put off and those things are coming in for repairs now, so we are seeing some benefit from that probably. Regionally or geographically, we continue to not do as well in the Gulf Coast states. The benefit of, on a comparable store sales from the recovery from Katrina was significant and last for long time and... while that's improved a lot, we still maybe aren't doing quiet as well there as what we had been following Katrina, but we continue to see incremental improvements. Other than that our comparable store sales were pretty steady and good throughout the company.

All right, thank you. And one quick follow-up, as you continue your double-digit pace of growth are you finding it more challenging at all to maintain this kind of productivity or you still seeing plenty of opportunity out there, both, from a store perspective and the performance you are seeing in new store?

Well, every store, every new store varies, and a lot of it depends on the team you put in place when you open the stores as far as how fast it comes up. From purely an expansion standpoint, real estate on the East Coast is obviously a challenge, and to find good properties that fit our business model at a price we want to pay is an ongoing challenge and we work real hard to do that. Ted, do you have any additional comments on that.

Well, obviously, I was just looking the other day, this year we've gone into, probably, more major markets than on the average expansion year, for instance, like today, in Ohio, Columbus, Cincinnati, and those are multi-store markets. So, it really takes a little longer for that group of stores to get off the ground, because you have to start with a hub store, big inventory, since you don't have a distribution center there. I mean, you feel the marketing, and so kind of the strength of those stores, they evolve as you get better store count and staffing starts to mature out, so some of those markets are... perhaps a little bit longer term as far as getting the results that you might if you go in with one store and one store market with less competition.

Thank you, Greg and Ted.

Yes, thanks.

Thank you, sir. Our next question comes from Tony Cristello with BB&T Capital Markets. Anthony Cristello - BB&T Capital Market: Thanks. Good morning, guys.

Good morning, Tony. Anthony Cristello - BB&T Capital Market: Maybe, you can comment a little bit on how much the delays in store openings, and what's going on with real estate actually might have caused you in the quarter. I know you talked about that being part of the de-leverage, and is that something that acts as a headwind until you sort of figure these things out and how should we approach that going forward?

Well, what happens is, Tony, is in the second quarter with some of the heavy rains in our extension markets, we got behind on a construction schedule, and then when you do that you subsequently get behind on permitting, so it is a little bit of a headwind, we view it as something that's temporary and fixable, but it will carry into the fourth quarter because we are opening a lot more stores in the fourth quarter than what we have planned. And some of those from a pre-opening payroll standpoint, we will carry some payrolls that we would not be generating the adequate revenue from, but it's a right thing to do for the individual store opening. A part of it has to do with just the timing of construction and the weather-related construction, part of it has to do with permitting. We're doing everything we can to better control when we complete our stores and when we open our stores, but sometimes you get into situations with municipalities that are just a challenge to deal with, and take a little bit of time and then of course the weather has an impact on construction. So, we don't view this as anything that would have a long-term effect on our ability to expand at a rate similar to what we are expanding, but it is something that we'll never... not be a challenge. And this year because of the weather in second quarter has turned into more of a challenge toward the end of the year than we would have liked.

And then, Tony, I might add, anytime we have a store delay, depending on where it's at in relationship to other stores. That payroll just doesn't sit around, it's back in existing stores, they are getting better training, they are helping that store give higher service level, so there is some positive there, although we much rather have a store open on time.

And then Tony to answer your core question, can we quantify it? No, we really can't, we really aren't quantifying the SG&A effect of that. And this time we have some...

Well, I think Tony if you look at the fourth quarter guidance you will see it's a little below where consensus had been and that reflects these delays and the cost that are going to be associated with that primarily payroll and then of course we would like to open stores in the first or second quarter, it's better for the economics of the store, but again this is a temporary item that we get these stores out there and get them running. Anthony Cristello - BB&T Capital Market: Okay. And I guess as my follow-up, if you look at a 4.3 or a better then that comp, traditionally should we expect to see leverage on that type of number and is that basically, really, the difference between de-leverage now and maybe 6 months or 12 months from now what we can expect?

Yes, we continue to believe that we'll leverage SG&A, 3.5 to 4. Obviously, this quarter we did not and we associate that with these temporary delays in store openings. We see that still being a headwind in the fourth quarter, but plan on correcting it after that, but now that the stores are in the pipeline and staffs that have been hired are hired we need to roll through this cycle. Anthony Cristello - BB&T Capital Market: Okay. Great. Thanks guys.

Thanks.

Thank you, sir. Our next question comes from the line of Rick Weinhart with BMO Capital Markets.

Hi, good morning, gentlemen.

Good morning, Rick.

My question is on the acquisition front. First of all did you have any acquisitions in the quarter, small ones, at all on that store opening path?

Yes, we... in the third quarter we had four acquisitions.

Okay.

Yes there was four, one was a two-store chain that's actually how we entered the El Paso market.

Okay. Great. And I am just wondering out the environment there. Given that we've now been in a, let's say an industry slowdown for several quarters, I think the expectation was at the beginning of this that you might see some more opportunities in that area. Are you seeing any at this point, it doesn't seem from the numbers but maybe there's more discussions going on than previously?

We have got a person that's in charge of discussing acquisitions all the time and we are out there looking hard. Again, we are very opportunistic. It's got to be a right fit from both an acquisition cost and just the culture of the store we are buying. And so we are, again, we're in conversation now with two or three smaller chains. Now where they will go there is no guarantee and we certainly don't base our store growth on that to any degree.

Rick,this is Tom, we continue to see that as a very good avenue for us to expand, it's been very successful in the past. The four stores that we bought this quarter, we obviously, like that to be a bigger number going forward. We will continue to work hard in that area, but we'll remain disciplined in what we pay.

Okay. That's great. It reminds me just in the past I mean is it usually your... the multiples that you look at when you pay for these deals?

Most of them are asset... we buy the inventory and the goodwill so to speak is the difference between what they pay for the inventory and what we pay for inventory because we typically we buy the inventory of what they paid for it, and sometimes depending on their business there maybe a small component of goodwill but they are not bought on a multiple of profits, they are bought more on asset basis.

Okay. And this is my last follow-up here. The... on the... your last major acquisition in Midwest. Originally you talked about getting operating margins up to the O'Reilly chain business. I haven't heard an update on that, I know it's been some time. Have we reached that level yet?

Yes, some of the stores out there are obviously are lower volume stores and probably haven't or hadn't reached the sales averages that we would like to see but there are low occupancy expense stores and because of our acquisition cost and our managing of price and the market share gains that we've made out there, those stores now fit well into what we would expect out of a typical O'Reilly Store.

Okay. Great. Thanks very much gentlemen.

Thank you, sir. Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Hey guys, it's Scot Ciccarelli.

Good morning, Scot.

I was wondering if you guys might be able to provide us with any feedback either from the stores or I guess primarily from your commercial customers on the kinds of cutbacks that they are seeing from their customers, what kind of maintenance things are customers delaying at this point, just so we get a better feel for it. What are people willing to pay for in this environment and what are they not willing to pay for in this environment?

The thing that I have heard most prevalent is the air-conditioning repairs, this time of the year, obviously, and especially with some of the markets that we are in, which can be very hot markets in the summer time. And the fact that air-conditioning repairs are very expensive repair on cars today or can be, air-conditioning repairs are being deferred. And we see that as we look at our sales by category. And I would guess that our competitors see much of the same thing. I think the only reason in this environment you wouldn't see that is if you had just a really bad year or the year before in air-conditioning for reasons that can be product reasons or availability reasons, things like that, but I think the air-conditioning business, as an industry, this summer has been down. Another category that suffers in times like this would be something like shock absorbers, where it's just an option to replace them. They are hydraulic dampening unit which if it doesn't work right in the car really it isn't going to make the car un-drivable. It does affect safety to some degree, but... and over time they have to be replaced, so this is something that can be deferred. Categories like, rotating electric starters and alternators, obliviously, can be deferred, brakes can be deferred, maintenance can be stretched a little bit, when it comes to oil changes and filters and so forth, but they still have to be maintained. So, primarily, when I referenced that, I was referencing to temperature control or air-conditioning sales.

But Greg, I think that was actually mentioned last due in terms of FC, but is it fair to assume that's why not getting the core summer months here that, that should actually be less of a drag now?

Yes, I think from a comparison standpoint it will be. As the temp control moves to heater cores and hoses and so forth in the winter time, and those things if they still have to be repair the car in person inoperable.

Okay. All right. Great. Thanks a lot guys.

Thanks.

Thank you, sir. Our next question comes from Scott Stember with Sidoti. Scott Stember - Sidoti & Co.: To that point of weather. Could you talk about... obviously, we've seen some abnormally warm weather considering it's the fall. Has that had any impact one way or the other on your business and if we were to see this continue for the rest of the quarter could that have a negative impact?

Well, it's always hard to predict the impact of weather on your business. As I know you all know, the weather extremes from a short term perspective are good for our business, I mean, they cause some business that would have eventually come to maybe come a little bit quicker than normal. After immediate cool and wet, early part of the summer season this year, the latter part was hot and dry, which was obviously good for our business, and I have no doubt, contributed to our comparable store sales performance. If we had an extremely mild winter which I think is what you are referencing, if that was the case, that obviously wouldn't be as good for business short term as an extremely cold winter. But again those short term weather swings, really, in the long haul make very little difference. The weather is the weather and eventually parts that are going to fail, fail. Extreme weather conditions can cause them to fail quicker than they might normally, but we don't expect any negative effect at this point from weather in the quarter, but obviously if we have a role model winter, it would have some affect that would be hard to predict. Scott Stember - Sidoti & Co.: Okay. And could you maybe just explain, again, how the extra Sunday had a negative impact in the quarter. Just talk about that relationship one more time, I don't know if I got the whole discussion?

Well Sundays are our lowest volume days of the week, and comparing you on a calendar quarter and our comparing our quarter this third quarter, we had one more Sunday in say the 90-day period than what we had last year. Those Sundays are such... so in affect we were comparing Sunday's business to a day-of-week business in the previous year, and that creates approximately a 50 basis point drag on comps for the quarter. We make that up in the fourth quarter. And it shoots up back the way we do our reporting, and many retailers do it week by week, so they have dead-even comparisons because this is not unlike the effect that a Sunday or any certain day of week would have on other businesses, and that's the reason so many companies go... even week comparisons because we are calendar quarter, we had this negative effect in the quarter. And I thought it was worth mentioning just from a pure calendar perspective and also one of the reasons that we see fourth quarter is having a little bit of a pick-up since we had the drag in the third quarter. Scot, because on Sunday virtually none of our installer customers are open. Really and not even half of our business doesn't operate on Sunday. Scott Stember - Sidoti & Co.: Okay.

And in some markets Scot, depending real markets, even ERs are a little shorter, as you are not open as long. It's a good retail day but it certainly doesn't offset the amount of wholesale business we do directly. Scott Stember - Sidoti & Co.: And just, Tom, just to clarify that $1.69 to $1.73 that is including stock options.

That is including stock options, yes. Scott Stember - Sidoti & Co.: Okay. Thank you.

Thanks.

Thank you, sir. Our next question comes from Dan Wewer with Raymond James.

Greg, during the quarter your sales per square foot appears to decline about 1% despite same-store sales growing more than 4%, suggesting that new store sales volume are bit weak. Is this reflecting the startup in some of these major markets in Ohio that you alluded to?

I think it's a reflection probably of that and then also just the timing of the new store openings to some degree. In any given store we have stores that we open that just not the cover up the ball the first month, and then we have stores that it takes some work to get them up and running, and this would be reflective of some of that, yes.

Dan, something else that we've implemented this year. From a real estates standpoint, we are buying a big enough piece of dirt, but we are putting in a store that was just a little bit too small for what we wanted to do from a product presentation. So, we expanded the store by roughly 200 square feet, we added five-foot depth on our display floors, which doesn't sound like a lot but it's you know six inches in isle and two feet on the front isle and back isle and it made our store feel totally different as far as just being spacious and more shopable. So, that's having a small effect and will from now on from just going from a 6,800 square feet store to little bit over 7,000 square feet store.

How does that impact the capital investment in any store?

Very, very little, because what you have got is 200 square foot of additional building but it's not in per square foot, it's not a big increase at all. Maybe $15,000 a store; $20,000 a store, but again, the parking lot all the site were the investment of the dirt, it's stable, it's just adding a little bit more square footage inside. Didn't effect restrooms and eating, I mean, it's just really the cheapest square footage you could add and now the time to do it for the future. And also on the relocations we are upgrading a lot of these 38 stores will do. We are obviously moving because they are in small maybe acquisition stores, stores that we've outgrown that were the old 5,500 square foot or 6,000 square foot. And again we are moving up to that 6,800 to 7,200 square foot building. And your point, you know these hubs and these metro areas, instead of being in the 7,000 square foot range, they are anywhere from 10,000 square foot to 18,000 square foot.

That's very helpful. And then just as a follow-up, you noted that your do-it-yourself business is growing well, yet if you look at your do-it-yourself revenues per store, it's substantially lower than some of the competitors. I know this has been an area that you are trying increase your focus but if you could give us an some of the things you are doing trying to make yourself more DIY relevant?

Well, as we said, we are seeing a little bit more marketing and advertising this year, just making sure that our brand is recognized in expansion markets. We are very focused when we spend money on print type promotions that we do the things and have done the research based on our past experience with promotions that are going to drive traffic into our store, and hopefully have customer experience higher level of service and better availability of inventory and turn those customers into DIY customers for O'Reilly. As you said, and I have said it several times, we see our retail sales growth as a huge opportunity for us. And really part of the push behind this scheduling system that we put out in the stores, that Ted mentioned, is that because of our wholesale heritage, our store managers and district managers inclination is to make sure that we are staffed very well to service professional side of the business during the week. And doing so and sometime cause us not to do as well in the prime retail times which are typically nice in weekends. And in the scheduling system has helped bring delight the store managers and DMs that maybe weren't doing as good a job staffing nice in weekends and taking advantage of what we see is the ideal time to increase our retail business, and start taking more retail market share.

Great. Thank you, and good luck.

Thanks.

Thank you.

Thank you, sir. Our next question comes from the line of Colin McGranahan with Bernstein.

Good morning.

Good morning

Just wanted to revisit the construction delay and permitting question a little bit, I understand that when weather causes a construction delay the permitting process gets behind, but it sounded like also you are just seeing a more stringent or bureaucratic process in some of the markets, especially the Northeast. Is that the case, and is there anything you can change in your approach to streamline that and then, if not how do you manage your pre-opening given there is going to be greater variability in the time to get that store open.

Yes, really, Colin, the weather is after the permitting process. You get the permit, you start the construction and then the weather kind of stops you. So, we've always dealt with weather issues and the only difference now is that you are dealing... we're working in Minnesota and markets like that. The bigger issue, probably this year, is just, to your point, the bureaucratic red tape that seems to be not only growing in the markets we are expanding into but even in the existing markets, it's just the whole mindset of City Hall and Department of Transportation to get a drive... I mean we had stores totally finished, merchandise in the store, and we haven't been able to get the Department of Transportation to give us a driveway permit for drive on the highway. Crazy things like that. It's frustrating, and what we found out, one major shift, we are making is we are outsourcing or we're getting local expediters to help us with a relationship as we are dealing with some of the new cities. And that's making a big difference, because people deal with people. And we are finding that it might cost us a few bucks upfront to get some local architects and expediters to help us through the permitting process. You could shave off literally months of red tape and sitting on somebody's desk. So that's one of the area, more local architects and people to help us be on the inside of getting permits. Another issue is just basically getting the CLO, once the building is done. Just a kind of sad story, we got stores opened right now... or not opened, but ready to open, and we were short one sensor for our heating system to go on the desk. It was backordered and the fire marshal wouldn't let us open the store because we don't have the sensor in this air duct. I mean that's some of the... again, the frustrating thing that we have to deal with but we are dealing with them. And again, we are adjusting, and then we know that part of solution is just to have more properties, as we continue to increase our store count, we also got to increase our pipeline and have more properties under construction at the same time realizing that this going to happen to some degree.

Okay. And then just as a quick follow-up. Inventory turnover, relatively flat, I actually, calculated up about 2.5%. And I guess, strategically what kind of rate do you think you will be able to improve the inventory productivity on a gross basis going forward?

Well we... in an ongoing way, since we've been running the company, we have always trying to improve it, and it's a challenge. The new model of cars and the changes in model of cars, and the changes in components makes this an ongoing challenge. So, we use a lot of systems as best to try to manage that. We like to see ourselves be able to get to 1.7 and grow from there, ideally we would like to get back to 2.0 turns, and we have been in 2 turns before. And with our growth that makes it a little bit of a challenge, because we have a lot inventory deployed in growing stores that don't turn the inventory very well until they are more mature. But over time we continue to internally target getting back to 2 turns but that's an optimistic goal considering our growth, but we continue to work with systems in various ways of trying to get there.

Okay. Great. Thank you very much.

Thanks.

Thank you. Our next question comes from the line Jeff Sonnek with FBR. Jeff Sonnek - Friedman Billings, Ramsey & Co.: Well, thanks, guys. Just to be absolutely clear, I mean you guys aren't, I guess, explicitly lowering your kind of expected square footage growth rate but this is more maybe a temporary hiccup related to this permitting store opening?

That's right and I mentioned in my earlier comments that our plan for next year is to open 205 stores and then we will add a distribution center in Lubbock, so we've obviously been through some challenges late in the year, this year. We really got them pretty well under control, as we're probably talking about it more than is justified considering the internal controls we have of ramping the job up in a 190 stores this year, but no there is not a change, our plan next year is to open 205 stores. Jeff Sonnek - Friedman Billings, Ramsey & Co.: Okay. And then just going back to the systems, I thought last quarter, Ted, said that few less rollouts should be done by the end of this... the 3Q, and now we're looking at year-end. Is there anything that happened or learnings you can share with us as to kind of why that timeline changed?

It's just the rollout. As we had a system in place as any software development, you find bugs and so they just had to stop, kind of freeze the rollout, go back, work the bugs out. It's very important that this thing is perfect, basically, by the time it gets totally out in the store. So, it's just, again, it's just the back of developing software and fixing the problems, and getting it rolled out. We're also allowing the districts to install the equipment and roll it out, so each district has one person that's going from store-to-store, so it just takes the amount of time to train, I mean, and get it in right. I mean, we would rather do it right, obviously, then push something out there and they have to pay a price?

And, Jeff, just to add to that. The actual hardware that it takes to run the new POS system, that's completed we're all installed there. What we were doing is rolling out the software, since most of the software was either written by programmers that we employ or was contracted to programmers that are managed by the analysts that we employ. We were fully responsible for any glitches that are in the software. And if you have ever been involved with software development, you know there is very seldom a program written that doesn't have some bugs in it that have to be worked through, and since this is the system that manages our revenue stream, we are just extremely careful in making sure that it works right. But we are done with the software rollout now, and that's being done and we are well done enrolled with it. Jeff Sonnek - Friedman Billings, Ramsey & Co.: And can you maybe just comment, I mean, where does POS fall within the larger kind of IT upgrade scheme. I mean, is this the most important thing as labor scheduling, where is everything kind of shake out?

Well, the way we do it, is we divide our IT resources into teams. And we have these various teams focus in different areas of the business. For instance, the IT team members that work in distribution on some of the things that they are doing, the difference is the voice activated picking and the various slotting analysis, things they do. They are completely separate from our retail team which focuses on the POS developments and other database things that enrich the customer experience when they are in our stores, and then we have teams that work in other parts of the company. So, I put our retail team and our POS system at the top of our list, but again there are programmers that focus on other areas of our business. And if you ask them, they would tell you that what they are working on is what they work on they focus on that a 100%. Jeff Sonnek - Friedman Billings, Ramsey & Co.: That was really trying to get at, really was just anecdotally as you see the margin benefits or the incremental benefits to your business via all these new systems deployments, what will ultimately be the most important piece of this rollout?

The most important piece of the POS rollout is, one, just from the ability for a new team member to learn our system has greatly improved, it's more... it's a graphical user interface, it doesn't run on Windows system, but it's more similar to Windows-type user interface as compared to a green screen interface, which is what we were previously using. So, we'll benefit significantly from the time it takes for a team member to learn how to use our system and be proficient [Technical Difficulty]. it also lays the groundwork for us to enrich the data that we have available to our customers and to our parts specialist from a perspective of diagrams, pictures of products, repair information, and just all those things that you will have in maybe more like a web-based type system. It allows us to just enrich that transaction which over time is going to result in, we feel like better customer service and better productivity.

I also might add that it facilitates that our new learning management system, our computer-based training through every terminal in the store, so it's just, it will be a huge training asset for us.

Jeff, to kind of pinpoint your question, if you look at our internal resource deployment and the capital expenditures, POS is definitely our most important project. Jeff Sonnek - Friedman Billings, Ramsey & Co.: All right. Great, guys. Good luck thanks.

Thanks.

Thank you, sir, and thank you, everyone. We have now reached the allotted time for today's questions for today's conference call. Sir, are there any closing remarks.

Yes, I just wanted to thank everyone for their continued interest in our company. We will work hard to make sure fourth quarter is a solid quarter [Technical Difficulty]. Thanks.

Thank you, sir. That now does concludes today's conference call, everyone, you may now disconnect.