O'Reilly Automotive, Inc. (ORLY) Q1 2008 Earnings Report, Transcript and Summary

Good morning. My name is Alicia and I will be your conference operator today. At this time, I would like to welcome to the O'Reilly Automotive First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Mr. Tom McFall, CFO of O'Reilly Auto Parts. Sir, you may begin.

Thank you, Alicia. 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, belief, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contained within the press release that are not historical facts are forward-looking statements. Such 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 that are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions including but not limited to competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the risk factor section of the company's Form 10-K for the year ended December 31, 2007 for more details. At this time, I'd like to introduce Greg Henslee.

Good morning everyone and welcome to our first quarter 2008 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. I'd like to start off our call today by thanking all members of team O'Reilly for their commitment to our culture values and for the great levels of customer service we work so hard to provide. Our success happens one customer at a time, and I know that every member of team O'Reilly makes customer service their top priority, and I want to thank everyone for their efforts in the first quarter. Now, onto our first quarter performance. When we had our year end conference call in mid-February, we were on a comparable store sales trend just better than the 2.1% comparable stores sales rate at which we finished the fourth quarter. At that time, we provided comparable store sales guidance in the 1% to 3% range to reflect the trend we were on which we felt it would likely continue through March. March turned out to be very sluggish, resulting in a negative 0.4% comparable store sales for the quarter. A couple of factors that we feel contributed to the softer comparable stores sales in the quarter, and especially March are the strong 6.8% comparable store sales comparisons we had from first quarter of last year with March being the strongest month of the three. Last year, our sales performance was enhanced by favorable early spring weather. The positive effect from the change made to the starting day at daylight savings time and the timing of the Easter holiday. As with other retail factors, our industry continues to feel the negative affect, higher fuel price is having on consumers. We continue to hear from our professional installer customers that there is a lot of vehicle maintenance that is being deferred and then many customers are doing the bare minimum to keep their vehicles roadworthy. I don't think anyone questions that most consumers are under a lot of financial pressure with higher fuel prices, not only hitting them hard at the pump, but also causing inflation of food prices and other consumable goods. Our customers are having to make tough decisions about vehicle maintenance and repair, and we continue to see some of our lower priced private label entry level products growing faster than our premium branded products. Consumers frequently are making the choice to save a little now as opposed to paying for a premium product that would last longer and perform better. In the first quarter, we had a very significant swing in the performance of some of our product categories as compared to others. For example, the battery category performed very well with double-digit comparable store sales. While temperature control, air conditioning and heater parts performed very poorly with double-digit negative comp store sales decline. I attribute this to a combination of the significant difference in the weather we've had so far this spring compared to last year. This year being much colder with spring arriving later in most markets as compared to last year. But also to the deferral mentality into which many customers currently are forced. If one car won't start, it needs a battery; the only options are park the car and not drive it or replace the battery; whereas if the air conditioner or heater is not working correctly, the car can still be driven and the repair deferred. Evidence of the stress, consumers are under is also indicated by the tendency of vehicle owners to keep their cars longer with the average age of the vehicles on the road at record high. In the long run, this is obviously a favorable trend for the automotive after market. And while miles driven were slightly down in '07 to 3.003 trillion miles compared to a record high of 3.014 trillion in '06. We continue to feel strongly that we'll eventually benefit from the release of some of the pent-up demand that has been created over the past couple of years as households have continued to struggle to adjust the higher cost of fuel into their budgets. More obviously, not pleased with our comparable store sales performance in the first quarter and especially for the month of March. It's very clear that the very challenging economy in which we currently operate is putting a lot of pressure on our customers. However, we remain optimistic on our ability to grow comparable store sales in the second quarter and for the year. As we've mentioned before we feel very strongly that over time this deferral of maintenance and repair creating pent-up demand will begin to release. With three weeks to the second quarter behind us, our comparable store sales has significantly improved as compared to our performance in March and the first quarter. Spring is finally arriving in most of our markets and business is incrementally picking up as it does every year with the initial onset of spring. Based on our performance so far this quarter as well as softer comparisons to 2.0% comp store sales growth last year which softened towards the end of the quarter which is typically the highest volume portion of the second quarter, we're providing comparable stores sale guidance of 3% to 5% for the quarter and for the remainder of the year. With three weeks behind us, we're currently comping in that range for the quarter. We continue to feel very strongly about the advantages of our dual market strategy, our strong distribution network and our unparalleled access to the parts our customers need to keep their cars and trucks on the road. Our business mix has been right at 50% retail do-it-yourself and 50% wholesale do-it-for-me for a long time now, with the first quarter finishing up right at 50-50. While we don't disclose our comparable store sales in each our business segments, I can tell you that our perception has been that the retail do-it-yourself side of our business seems to have been more negatively affected by this challenging economy. We assume this due to the fact that many of our DIY customers work on their own cars out of economic necessity, while a portion of our do-it-for-me business comes from customers who have the ability to do the work themselves, but have the option financially to have a professional technician do to work for them. This is very clearly indicated by our comparable store sales performance in the first quarter with our commercial comps finishing up well into our comparable store sales guidance range and our DIY comps finishing up negative. Now, onto some more details about our first quarter performance. Our gross margin for the quarter came in at 44.6% of sales compared to 43.9% last year, a 70 basis point improvement. We attribute our improvement in gross margin to our mix of business with growth on our private label offering serving as a contributor. We also continue to work on improving our acquisition costs and in managing our selling prices to be competitive yet yield a solid gross margin and are comfortable with our gross margin forecast for the year in the 44.4% to 44.7% range. Competitor pricing on both the retail and wholesale sides of our business, remains relatively rational with no material changes to report in the first quarter. Operating expenses for the quarter increased a 190 basis point to 33.2% of sales from 31.3% last year. This increase is primarily attributed to the loss of leverage with a negative 0.4% comparable store sales compared with a 6.8% increase we achieved last year. On a per first store basis our store operations team did an excellent job of managing payroll in a tough environment. Our company is geared for growth and while its difficult for us to quickly adjust to abrupt swings in our business in many areas of our operation, I think we've come a long way in the past six months in dialing in and on the methods by which we manage our store payroll expense and our ability to forecast our staffing needs. Ted will be providing more detail on some our efforts in this area in a moment. As a result of the decrease in leverage, our operating income came in at 11.5% of sales compared to 12.6% in the first quarter of last year. During the quarter we opened an additional 37 new stores bringing in our store count to 1,867 stores. These additions brought our inventory investment to $893 million, an 8.2% increase supported by a 5.4% increase in sales and a 10.7% increase in store count. Inventory turnover, remained equal to last year at 1.6 times and our turnover net of payables improved from 2.8 times to 3.0 times, as we continue to pursue mutually beneficial relationships with our vendors and to negotiate the best possible payment terms. Our accounts payable, as a percent of inventory improved a 160 basis points from 45.1% last year to 46.7 % this year. To summarize, we continue to work on improving the execution of our dual market strategy, as we plan the acquisition of CSK Auto. This is a very exciting time for team O'Reilly as we start making plans for the combined companies. Over the past few weeks we have done much exploration and planning and there is still a lot to do, before we are ready to talk publicly about more detailed integration plans, but I can tell you that we've been very excited and encouraged by the quality of the CSK Auto team and the prospects of the combined companies, as we work to expand our dual market strategy coast-to-coast. While there is a long list of things, we need to do to integrate CSK over the next couple of years, following is a short list of things we will focus on first. People, we feel there is a great team currently in place at CSK, and we are looking forward to combining forces to provide the CSK store teams the tools they need to be successful. Making sure we clearly outline the way we do business and the success we've had with our dual market strategy and the culture that's driven that success is key. Systems, for us to execute our strategy we have to have tightly integrated systems in place to manage distribution, inventory deployment, pricing, our commercial strategies and a long list of other needs. Systems integration will be a primary initial focus. Distribution, I don't think its any secret that one of the keys to our past success is our ability to put inventory in our customers' hands quicker than our competitors. CSK's distribution strategy differ significantly from ours and we will be working to beef up the distribution network in order to put us in a position to further penetrate the commercial side of the business and being much more competitive on the retail side. Inventory, having the right products in the right place is one of the fundamental keys to performance in our business. We feel we've developed excellent systems over the years to manage our inventories and we are looking forward to further leveraging these systems as we integrate CSK. Key areas of focus will be evaluation of the coverage needed to service the vehicle population in the various markets. Good, better, best philosophy and the evaluation of the products, the product brands necessary to maintain and grow the retail business while further penetrating the commercial business. Brand and store display design over time, we'll evaluate the effectiveness of the four store brands currently used by CSK. Our goal will be to evaluate a possible re-brand of these stores to O'Reilly as we freshen up the store appearance and stream line the display merchandize in order to enable a national brand platform. This short list is just touching on the high points as we begin the work of developing a detailed step-by-step plan to combine the two companies. Our management team is thoroughly excited about this opportunity and is working diligently to outline very specific plans to leverage the best of both companies into one national force. As we've announced at the end of last week, we were able to get early HSR approval and are moving forward with the required filings to close this transaction this summer. I would like to again mention that we continue to believe that the macro economic conditions continue to drive many consumers to defer some of the vehicle maintenance items that can be deferred and we continue to feel confident that we'll eventually benefit from the pent-up demand that is being created. Our team believes very strongly in our culture and our strategy and I want to once again thank every member of team O'Reilly for their hard work and for their dedication to the success of our company. We are looking forward to a solid second quarter performance and a strong second half to 2008. I will now turn the call over the Ted Wise, our Chief Operating Officer.

Thanks Greg. Now to quickly review the status of our new store schedule. We did complete installation of 37 new locations in the first quarter. These stores were distributed over 18 states, once again Texas led with 8 stores, South Carolina and Georgia had 4 stores and the balance of the 21 stores were distributed in the 15 additional state. Servicing our stores from our 14 strategically located distribution centers, allow our expansion to be evenly spread across the company, and provide our store sales and operations' teams the time and ability to better prepare for staffing and entry into each market. The Atlanta, Indianapolis and St. Paul, Minneapolis DCs continue to have plenty of expansion capacity for our future growth in the upper Midwest and Southeast parts of the country. As previously announced, we are opening our new Lubbock distribution center in Lubbock, Texas this October, which will support our growth further into West Texas, New Mexico and Southern California. Now with the addition of CSK stores, currently located in these markets, the Lubbock DC will open supporting a larger group of stores than previously planned which will give us good expense leverage for the DC and most importantly improve inventory in service levels for this group of CSK store. We are also in the process of closing the purchase of a 300,000 square feet distribution center located in Greensboro, North Carolina. This is a new building but we are acquiring an extensive interior build out and our tentative plans call for an opening date of second quarter next year. This North Carolina DC will provide the much needed relief for our Knoxville DC as well as redirecting some of our current and longer and much higher cost throughouts from a service standpoint out of our Atlanta DC. The addition of this distribution centre will not only allow for us to more efficiently service our existing stores but we will open up continued expansion opportunities into Carolina, Virginia, West Virginia. In addition to the 37 new stores, we relocated 12 stores into new buildings during the first quarter and completed 40 store renovations. We also installed another 85 store interior décor packages which brings us very close to completing this company wide project which was basically a restriping just basically a refreshing of the interior décor package for the entire company. In the second quarter, we have 58 to 60 planned new store openings which will bring us to over 95 stores for the year. This relatively aggressive schedule in the first half of the year is related to our previous goal of opening 205 new stores for the year which will be adjusted back to 140 to 150 new stores with the CSK acquisition. We are in the very preliminary planning stages with CSK integration, but obviously our installation teams will be involved in the conversion activities staring with the CSK stores, and existing, and adjacent markets. We will continue to evaluate our extension plans within our existing footprint, and while we haven't determined that number we expect it will be in the range of 150 stores in 2009 and then start ranking back up in 2010. In regards to the sales results for this past quarter, while the results were disappointing we can honestly say that was not due to our lack of effort and overall execution of our dual market strategy programs by our sales team. We obviously began this year knowing that we were going to be faced with tough comparisons, especially in the first quarter. Our stores focused on giving the best customer service to both our retail and first call installer customers. And we are proud of the efforts that were made in the first quarter. Our company objective is to do everything possible to grow profitable business. As Greg, outlined higher fuel costs, along with the consumer uncertainty and the challenging economic conditions resulted in many DIY purchases and repairs for do-it-for-me customers being deferred. I want to thank our entire O'Reilly team for their commitment to customer service, and we are confident through our hard work and commitment to great customer relations. We will be able continue to improve the sales trends we've seen so far in the second quarter. With regard to expense management, increased emphasis and evaluation of our controllable expenses have been implemented throughout the entire company, particularly in payroll and staffing management. Our dual market business model is based on higher service levels which require a higher ratio of full-time to part-time team members. This makes it much more difficult to manage payroll in sudden or short-term business swings, and typically any extra-time in the schedule is allocated to making additional sales calls, in-store training and to step-up current service levels to expand our customer base. This staffing philosophy has been the key to our past comparable store sales growth; with the ability to give the best customer service in our markets. We do realize additional opportunities for adding part-time team members to the staffing model, to support the retail hours and give us more flexibility in scheduling for both slow and busy times, while providing a stable schedule for full-time team members. This past quarter we expected a challenging payroll situation with comparisons to the 6.8 comps we achieved last year. Our store management team reacted accordingly, and maintained good control of labor cost. The result was a reduction in the average per store per day payroll dollars of 3.5%. Obviously, this wasn't enough to offset the difference in our comparable stores sales compared to first quarter of last year, but did make a material difference. Our new scheduling system is providing... proving to be a great tool to provide our managers the information and sales forecast necessary to help make the best scheduling decisions possible; and to manage store productivity. In addition, we are implementing an enhanced payroll reporting tool to better inform district managers on a more timely basis. We continue to evaluate each individual market, and the level competition to create a staffing strategy that will support the ongoing sales growth opportunities in each market. As announced recently we completed the installation of our new Infinity part system, our POS system towards the end of the last year and we are receiving very positive comments from the field in terms of ease of use, and especially for training our new parts specialists. The new graphical system gives us the ability to introduce sales tools by product images, specifications and diagrams. We are currently enhancing this POS system with a new related sales tool, which will automatically displace specific related sales items on the lookup and seamlessly add these additional related sales to the invoice, are intended obviously to drive more related sales, and provide the training to our team members to help customers from a service perspective and make sure they read the store everything they need to properly do the repair. We hope to have this new application tested and rolled after the stores in the third quarter of this year. We continue to look for additional enhancements to this system that will improve team member productivity and customer service levels. In closing, I would like to say thank you to team O'Reilly. We're very excited and motivated by the upcoming acquisition of CSK and look forward to the integration of our business plan and O'Reilly culture with CSK team. We do however, realize this throughout the transition that our existing store base must continue to be aggressive and grow sales and profit, and we will require an ongoing commitment from all of our team O'Reilly. With this, I'll turn it over to Tom.

Thanks Ted. Moving onto the numbers. Sales were up 5.4% to $646 million for the quarter for the comparable store sales decrease of 0.4% for stores open greater than 12 months versus 6% to 8% comparable store growth for the first quarter of 2007. Sales to independent jobbers, team members and equipment sales which are not included in our comparable stores sales calculation were $15.2 million for the first quarter of 2008, which was a decrease of $1.2 million from the prior year; a 6.9% decrease. Gross profits was 44.6% of sales for the quarter versus 43.9% in the prior year. The improvement was primarily due to mix of products and improved acquisition cost. SG&A for the quarter was 33.2% of sales versus 31.3% in the prior year. The deleverage was a result of significantly lower comparable stores sales results and the additional investments in new store technology made in the third quarter of 2007, which will anniversary in the third quarter this year. To illustrate the deleverage impact sales had on SG&A, if comparable store sales would have been 1% the bottom end of our comp guidance, SG&A as a percent of sales would have been 32.8%. The accounts would have been 2%, SG&A would have been 32.5% of sales; and accounts would have been 3%, the top end of comp guidance SG&A would have been 32.2% sales. Operating income for the quarter was 11.5% of sales versus 12.6% in the prior year. The tax provision was 37.14% of pre-tax income for the quarter versus 37.28% in the prior year. Net income for the quarter was $46.3 million versus $48.4 million in the prior year. For the first quarter, net income was 7.2% of sales as compared to 7.9% in the prior year. Diluted earnings per share for the quarter was $0.40 per share, which was $0.02 decrease from the prior year. First quarter 2008 EPS is based on a 116.3 million shares as compared to 115.4 million shares in the prior year. Moving onto the balance sheet, inventory was $893 million, up $67 million from March 2007. This represents an 8% increase over last year versus 11% increase in store count over the same period. Total assets were $2.4 billion, a $304 million increase from March 2007; the increase is due to growth in fixed assets of $195 million, inventory related to store and distribution center growth of $67 million and an increase in cash and investments in CSK stock of $44 million. Accounts payable of $417 million was an increase of $45 million over March 2007. AP to inventory of 46.7% increased to 160 basis points from 45.1 % at March 2007. AP to inventory ratio was positively impacted by better vendor terms and improved leverage of the inventory store level in the newer DCs. Debts levels were $100 million at the end of the March, 2008 versus of $101 million at the end of March, 2007 with the decrease attributable to capital leases. During the second quarter $25 million of private placement notes carried interest at 7.72% will become due; we plan to redeem these notes with cash-on-hand. EBITDA for the quarter was $97 million, 14.9% of sales versus prior of $95 million, 15.6% of sales. Two other performance ratios, return on equity was 12.2% at the end of the quarter, return on assets 8.4% and return on invested capital 11.7%. For some other financial information, during the first quarter the reserve for LIFO increased by $3.5 million versus a $0.4 million increase in the first quarter of 2007. Depreciation was $21.5 million for the quarter versus $17.4 million in the prior year. Capital expenditures to the quarter were $59 million versus $64 million in the prior year. Interest expense was $1.4 million for the quarter versus $0.8 million in the prior year. Stock option expense for the quarter was $1.4 million versus $1.1 million in the prior year's quarter. For the quarter cash flows from operating activities was $119 million versus $129 million in the prior year, while the AP as a percent of inventory for the end of the first quarter 2008 improved 160 basis points over the prior year, the increase of the first quarter of the preceding fourth quarter was 350 basis points in 2008 versus 590 basis points in the prior year. This reduced rate of improvement drove the decrease in the cash flow from operating activities. Free cash flow for the quarter was $60 million versus $65 million in the prior year. The decrease was a result of decreased cash flow from operating activities offset in part by lower levels of capital expenditure. Moving onto guidance, our guidance for both the full year and the quarter are based on our previously revised new store estimate of 140 to 150 new stores for 2008; and does not take into account the planned acquisition of CSK. For the full year our capital expenditure guidance is $220 million to $230 million; depreciation $91 million to $94 million with a tax rate of 37.0% to 37.2% of pre-tax income. Free cash flow for the year has been revised up to $75 million to $85 million for the year based on the 140 to 150 new stores. Gross margin guidance is 44.4% to 44.7% of sales and revenue $2.7 billion to $2.8 billion with the slight reduction with the reduced numbers still worse. Our same-store sales guidance for the year remains at 3% to 5% and our diluted earnings per share guidance for the year is $1.81 to $1.85 with stock option expense and then estimated 117.4 million shares. For the quarter, our same store sales guidance is 3% to 5% and our diluted earnings per share guidance is $0.47 to $0.51 per share and an estimated 117.3 million shares. At this time, I would like ask Alicia, the operator to come back and we will happy to answer your questions. Alicia? Question And Answer

[Operator Instructions]. Your first question comes from Tony Cristello of BBT Capital Markets.

Good morning, Tony.

Hey, good morning gentleman.

Good morning.

I guess I wanted to just ask questions on the guidance and when you look at the 3% to 5% guidance versus what you have last year in the second quarter; and Greg I think you talked about from a seasonality or volume standpoint you typically see volumes build as the quarter progresses. Last year you had flooding I think in certainly that impacted Texas and Oklahoma, and was that... which months first of that really impact and I'll let talk... answer that and I just have some quick follow-up to sort of my question on the quarter in terms of guidance as well?

Okay. Well just speaking to flooding last year in Texas to be quite honest Tony I don't remember which month that actually had the most effect. I can tell you as I mentioned earlier that to this point in the quarter we're within our guidance range and the comparisons toward the end of the quarter are more favorable and of course volume increases towards the end of the quarter. So that have led us to making or leaving our comp guidance to 3% or 5%.

Is there any concern with or I guess maybe phrase it another way, when I look 3% to 5% guidance we talked about the DIY side of the business being softer than the commercial side and correct me if I am wrong, the temperature controlled business typical in the summer with respect to air conditioning is a bigger DIY business. If the consumer with higher gas prices or lower miles driven, is there some risk that you don't get as much benefit on a easier compare because of that reason?

Well, there is certainly some risk in our comparisons to our DIY comps, last year second quarter are pretty soft. The DIY business was stressed in last year as it is this year. Our feeling based on first quarter performance and the weather that we've had in many of our markets so far this... during the first quarter is that spring hasn't really sprung at, and lot of that business is being pushed into the second quarter that would have happened the first quarter, last year which ought to give us confidence and issuing the 3% or 5% comparable store sales guidance for the second quarter.

Okay. But in the temperature controlled category in itself is that one... that's a bigger ticket category for you and is it a higher DIY category as well?

No. It's really more, it's more of a do-it-for-me category. There is some minor things that DIYers do and there are still are some DIYers that try to put refrigerant in their systems and they may do the component replacement and then take it to a shop to have the system evacuated and recharged. But for most part that say, the overall hard parts category of that is more of a do-it-for-me business and it is DIY some of the ancillary items like the DIY recharge kit and the leak test dyes and things like that we do quite a bit of DIY business but more of it is do-it-for-me.

And as you... when you put in your guidance I just wanted to... do you factor in the macro in terms of gas prices or any of that? Are you just basically look at from a comparative standpoint, from a demand standpoint how things were and what your expectations is in terms of how they will play out?

We look at our comparisons, kind of what trend we've been on; what weather effects we might have had coming into the quarter things like that. It's hard for us to gauge as it is for you all also I know to gauge the effect of higher gas prices. And I've seen the observation sort of been made by the people that focus intently on the cost of crude and the potential effect on gas prices and so forth as much as any one else. And it's hard for us to predict what effect that will have. We know that in most of our markets people really don't have a choice that they user their cars for transportation and most consumers are right. I feel like virtually all consumers want to user their cars. They want to use private transportation and like the I guess luxury of having private transportation, the convenience of it and they are willing to sacrifice some of the other things that are like going out to dinner and things like that in order to maintain that as opposed to sacrificing, using their car when they might want to as opposed to car pooling as opposed to using public transit systems and markets where they have public transits. Although I'm sure there are customers that will make the decision to use public transit to some degree in markets that they are available. But, I guess I would say that we factor the effect of gas prices into our comp guidance to a lesser degree, just because it's hard for us to accurately factor the effect of that is. It's easier for us to deal with the things that we, no one understand and that are the trends that we've been on, due to conditions that contribute to those trends and so forth.

Okay great. Thank you guys, thanks.

You bet. Thanks Tony. Thank you.

Your next question comes from Dan Wewer of Raymond James.

Hi, guys. A bit confused with the sales performance during March and then what you are seeing in April. I understand your comments that halfway through the first quarter same-store sales were in the 1% to 3% rate. But we had a very difficult comparison during the months of March. My question is we knew that the comparison was difficult in March, so why was that not taken into account when that original guidance was provided?

Yes. Well, March wasn't that much more difficult. March improved quite a bit last year, but it wasn't huge compared to the rest of the quarter. Maybe it was the best quarter of the months last year. And it was taken into consideration to the degree that I feel it should have been. We were on a trend that we lead... that lead us to believe that our comps would end up in March in the 1% to 3% range or we certainly wouldn't have expressed that we felt that our comps would end up in that range. And then of course March for various reasons and it's easy to look back at things that might have caused comps to be soft in March. But comps were very soft for us in March, and whether they were soft for the whole industry or not I don't know I know that we feel like weather was a contributor to our comp performance in March because of the late spring and then it was a tailwin last with the change to, day-light savings time and then the favorable weather and then also you know Easter Sunday fell in March this year where as it fell in April last year and that of course is a soft day for us, which is a minor contributor. But I guess to answer your question, we do the best we can based on the information that we have in our experience in the business to provide comp guidance that we feel like is accurate. And it's very difficult to do, its almost a crystal ball type thing when you are looking forward to a quarter and really all you have to lean on is, our experience in the business and the trends that we are on and the various macro trends that might affect us and we do our best to keep comp guidance accurate and we felt in the middle of February that 1% to 3% was accurate or we wouldn't issued it like that.

That leads into my follow-up question. The strong results you are saying during the first three weeks of April sound similar to what NAPA was talking about last week, but how do you know that this recovery in April is not a simply a head fake and that what we saw in March maybe more indicative of the future, particularly given the 30% increase in gas filling prices.

Well obviously we don't know, we don't know anything for sure relative to the future other than the fact that we know that there was a lot of business that didn't take place in March that will take place in the second quarter. And our feeling is that the spring coming late in many of our markets is pushing business into this quarter and are hopeful and we feel like that our guidance is as accurate as we can be coming up with the 3% to 5%. Like I said so far this quarter that's where we are at and we have softening comparisons towards the end of the quarter which is the high and higher volume portion of the quarter and for that reason we feel comfortable with the guidance. Now to your point that gas prices were despite significantly and consumer behavior change significantly then obviously that will have an effect it would be necessarily baked into our comparable store sales guidance.

Then, just final question I have for Tom you noted where the expense ratio would have been had you made the original sales plan, I was very impressed with the 2% drop in your inventory per store, how much will the inventory per store decline had you actually made the original sales forecast?

Would it decline slightly more we have a very real time inventory system where we look at what our demand is, and what we projected to be and replenish based on that most vendors have weekly or multiple times a week orders. So I wouldn't have anticipated that significant change in our inventory. Our inventory levels are where we think they need to be, except we would have higher sales, we would build the pipe and kept about the same number.

Okay, great thanks.

Your next question comes from Matthew Fassler of Goldman Sachs

Hi, good morning to you. I want to ask you about the performance of your new stores comparing the gap between your total in comps stores sales growth with your unit growth would suggest that for the second consecutive quarter that productivity remains under some pressure. And I would like to get some color for you as to how you see new store performance, if they are on plan and in fact you are on plan whether that plan was lower than would it been in the past and how that impact returns to expects extract from those units?

Matt in general our new stores are performing as we had expect and they are within the range of performance of past store years, given the tough macro environment though they are not at the high end of that range they will be at the lower end of that range, but still within our acceptable guidance and we don't think depicts for us that they are going to get to material level of sales, that we think they should be at.

Right.

From a performance stand point and how you guys measure that, well that's why we changed our discloser little bit, to include the independent jobber sales, the team members and the equipment sales which are not included in comps, those items you know were down 6.9% from the first quarter of last year which when you take that into the non-comp basis is a pretty significant amount, and should help you with the calculation for our new store performance.

Got you and that discloser just to recap that we are looking at, in the text?

Yes, I will repeat the numbers

Yes, that will be helpful.

The non-comp sales as we disclosed in our calculations are jobber sales, team member sales, and equipment sales.

Yes.

They were $16.2 million for the first quarter down $1.2 million from the same time last year.

Okay, we will run those numbers through and get a sense as to how what they look like and just a follow-up, I mean looking at your most of retail across the spectrum had easy comparison first two weeks of April last year, my sense from looking at your weather trends for rather specifically, is that a kind of range, specifically in your states oddly enough to a much greater degree than it did for almost anyone else pound for pound through the second quarter, did that jive with your recollection with the doubt that, you monitor on the conditions in your market cluster?

I think as Greg mentioned earlier, in most of our markets, we really don't feel like the onset of spring has really taken roof.

Talk about last year just as to think about compares, when do we expect, that you would start? Any retailer will start April doing well, the question is, if the weather compares get tougher would that continue, its in your seems in your case the weather compares don't get softer to stay, pretty modest and give you some opportunity to maintain the momentum that you have?

Yes, I think that's right Matt. So far this year we have had, we have been having some tough weather as a matter of fact, that all of us don't have to file our federal and state taxes till May 19th, because this whole area has been the federal disaster area due to the flood and as a results, we get a month extra to file our taxes, as of do many of the markets in this area that have been so terribly impacted by the heavy rains, and no only the heavy rains, the heavy rains didn't last for, just a few days, they are heavy sort of rains, so we have had a lot of rainy weather. But the biggest issue is in just in cold, the spring has not come, the trees are just now starting to bud the markets would have normally ballooned back three weeks ago. And even though the days have got longer, people are working in, the DIY customers are working on their cars and driveways in cold weather they just kind of wait for weather to get better. Yes, we feel like we have good comparison not only from a comp basis but from a weather basis for the remainder of the quarter.

What would really help the after market in general will just be a really hot summer, it's been several years, since we have had extreme temperatures. But for whatever reason, and Tony was asking about air conditioning part sales and that's what really drives air conditioning business is that this unbearable hot temperatures.

Yes, some thing else that I want to mentioned also with regard to air conditioning sales is vehicles today maintain their value from a trading perspective a little longer and they did just a few years back because they are roadworthy at higher mileages if the air conditioner on a car doesn't work yet very, very significantly effect the trading value and resale value of the car and for that reason air conditioning repair can be deferred for some period of time, the consumer may get the value out of car they really are forced into fixing the air conditioner for accepting the fact that they get much less for trading and a resale and if they don't fix it and sell it off to a trade typically the reseller of the car always fixes the air conditioner before its resale because it just very hard to sell a car that has air conditioning that doesn't work because most consumers are aware their peer pairs are pretty expensive to repair this days.

Got you. Thanks so much.

You bet.

Thanks Matt

Your next question comes from Scott Stember of Sidoti & Company

Could you talk about the new stores that you talk about for 2009 which areas they would be and you plan on opening any additional source within CSK's footprint or this is just in the tradition of O'Reilly footprint?

Scott in '09 we'll just continue to feel out our existing distribution points and again Greensboro will be opened up in the second quarter of '09, so that will be more kind of Northeast expansion now as far the existing CSK markets knowing new markets more than like will be opening stores that would be in El Paso and Albuquerque and they will be in Southern Colorado where we will be able to distribute out of our Lobbuck DC.

Hey and just going back to fuel I know you guys in the past have talked about some measures that you have taken to try to mitigate some of the impacts on your cost, with diesel fuel so forth. Is there anything else that you are doing now but you can't do some maybe accelerates some of those efforts?

Well what we are doing now is really, is working on the freight side of where we ship products from our distribution centers to our stores, the computer systems that we've put on the trucks and the incentive programs that we have put in place to encourage our drivers to be more fuel efficient to drive the vehicle with the right RPM to use the right shift patterns and not leave the truck idling while they're unloading and all these various things. Incentivize and shares our savings on fuel we have seen meaningful results. As a matter of fact even with the softer comparable store sales in the first quarter our distribution cost were right at the same cost that we were last year first quarter and much of that is the result or could have been very negatively impacted had we not had these measures in place. And on the store side where we are using gasoline as opposed to diesel in running the hotshot deliveries and we do everything we can to make sure that we schedule and consolidate and ride our deliveries as best we can. At the end of the day it becomes a customer, servicing customer satisfaction issue with our commercial customers and our store managers and district manager try to balance that everyday. But it's a significant expense increase that we continue to deal with and we'll hopefully get better at that there is so much you can do and still keep the level of customers services at the rate we feel it needs to be. In the past we have used various small ranger trucks and we are in the process right now testing some smaller vehicles to get better gas mileage and would expect that we will be adding a different mix charge delivery vehicle to improve our fuel economy there.

Okay, thank you. That's all I have.

All right, thanks Scott.

Your next question comes from, Peter Benedict of Wachovia.

Good morning, Peter.

First, on the inventory how would you guys know what the right level is its be coming down on a per store basis I know it was a up a little bit faster than the sales of last quarter but could talk to me how you are thinking about that could that be impacting your sales at or you feel like the end stock is still in good shape?

Well, as you may know Peter we replenish our inventory five nights a week. So we don't on some of that it's hard to find to fortune [ph] we don't have a lot of depth to service the demand. We are very confident in the systems that we use do not only define what inventory goes into a market to begin with based on the vehicle population its there and in this we dynamically in our on going way to do adjustments to not only the depth but also aggressive inventory and then we give our store managers the latitude to add things to inventory that they feel like they need, for some reason they at certain fleet or whatever the case may be that we are servicing needs of certain product employees so they modify they've modified something on the vehicle to cause it to take a different in take filter or whatever the case may be. The store managers have the latitude to do that. We certainly don't feel like that anything that we're doing to better manage our inventories is resulting in softer sales as a matter of fact just the offset I feel like that the thinks that we do to put the right inventory to each store really is a contributor to our the penetration in each market. We have a system to log in any loss sale that we have at the store and that goes in to our demand forecast, we have done this obviously for a long, long time and all the stones that can be turned over relative to making sure that we have the right inventory in each door had been turned although we continue to work on ways to be better at everything we do. We feel like our inventory management systems are really second to hand.

But Peter I might add there the best way to tell if you have a problems is listen to the feel because our folks are not bashful when they feel they have an inventory problem and to Greg's point, the last couple of three years, that we have enhanced our systems is very positive feedback from the stores as far as our inventory levels as compared to our competition.

Hey, well thanks for that, on the trade down that you talked about the activity you are seeing in the store remind me when did you start seeing that with the more pronounced in the first quarter than it has been previously?

I don't think its more pronouncing and its really kind of hard to measure on that softer comparable store sales relative to just to the pure effect of the trade down, if you want to talk that. I would say probably the last 18 to 24 months its we have seen incrementally at a type the vehicles pick up and talking to some of our, branded suppliers, we don't act come up if we may be aren't focusing on selling our brands as much as we once were in the absolute opposite is true we certainly still promote our brands very much to our installer customers and we use them as they sell off opportunity to our DIY customers. But with that question and based on the day input from field, our privately label products are currently growing stronger on the DIY side and its surprises a little bit on the commercial side how many of our commercial customers are choosing in some cases to use our private label products as opposed to the branded products, simply because they have got the same, they are dealing with the same customers that we are to some degree and they are going to be priced competitively when they quote the job and they are quoting in many cases the private label option and a branded option to their end user. And evidently the end users are choosing, in some cases to use the private label, the lower cost option.

Thanks, one last one for Tom, any expense in the quarter for acquisition related efforts due diligence etcetera. Tom can you break any of that out.

Not material numbers.

Perfect, thanks so much.

Okay, thanks.

Your next question comes from Seth Basham of Credit Suisse.

Just to clarify on the comp guidance. As we think about the rest of the year, clearly it's reasonable to expect a little bit of pent-up demand from the March to come through in Q2, like you are now you are expecting a lot of pent-up demand, for the rest of the year or the macro to improve to help your sales going forward, great?

Well, I actually, at some point. All this maintenance that's been deferred over the last 18 to 24 months, that has come to fruitation at some point, that would have lot of unsafe cars, running around the United States. Our feeling is that incrementally we will see some reliefs in pent-up demand. And that's going to help offset some of the economic pressure that our customers are under. We do consider the fact that, there could be at any point... especially if there is any relaxation or a withdraw in the fuel prices that there could be some release in pent-up demand.

Some degree, if you cost, the new car sales report domestic and import cars sales were down. So that should mean, people they are keeping their cars don't have to look at things that they need to do to keep them on road versus trading them in.

From a comparison standpoint, we had a pretty good third quarter last year and not by a historical standards but by you may be the economic we are in standards and then we had a soft fourth quarter so that... our comparisons were obviously taken into consideration with our guidance.

Okay, that make sense. And from a macro standpoint you are not expecting improvement or significant improvement in the macros to help boost your sales going for forward for the rest of the year is that all right?

No, you guys probably know more than we do about the forecast of what's going to happens with macro environment. But our perception would be that the economy we are in is going to last for a while and without some meaningful change and the crude oil situation that might drive fuel prices down. We are not looking for any material change and we are hopeful I think everyone is but not counting on it. And we are also hopeful that the economic stimulus package that the federal government is in the process of pushing out will help them to. There are a lot of customers that $1,200 or $1500 spending on the number of children that they have could make a material difference in some of the things that they have deferred whether it's home repair or auto repair whatever the case may be.

And then on the gross margin side clearly there is a mix shift trends for a bit of time, but based on your guidance your gross margins for the year is sort of seems like you expect gross margin improvement not to be as great going forward how do you reconcile those two things and is there is a chance that we do see the strength in gross margins continue?

The couple of things have going on gross margin our distribution cost we continue to feel pressure there especially driven by diesel. The second item is we get a lot of support from our vendors for new stores as we reduce that number of new stores that's a pressure on gross margin. Obviously, in offsetting help around SG&A side and there has have been a lot of changes in prices from our suppliers especially on the commodity side that add risk to what we can price product that.

And then one more if I may quotes may over thinking a little bit longer term with CSK in the picture as you serve size up the synergies associated with that transaction and think about the buying power that you will as a larger company. How does that process work in negotiation with vendors and when do you expect to realize some of those big synergies from buying power while we see some of that go through in 2009?

I will... just kind of the process perspective and then I will let Tom speak to maybe the timing and the effect and to what degree we can speak of that on our gross margin. From a process perspective our vendors are very much a part of our growth they want to grow with the us, they participate in our new store growth every year and this is a significant opportunity for the vendors that we have at O'Reilly right now to possibly put their products in CSK stores and has benefit from the growth of CSK together and on the other hand CSK is established a lot of very valuable ands well known brands in their stores over the years. And we are going to consider the value of those brands in those stores before we properly make any changes and make sure that we are with the right brand and there could be changes we went back the other way where there is a branded CSK that we ended up with O'Reilly. We simply will back up and take a look at the performance over the products and in both companies and make the decision as to what makes sense going forward but the bottom-line is that for the combined companies we basically go back to the table with our vendors and say here is what we look at today. This is a significant piece of growth for both us and for your company. What this mean to be efficiencies in which we can operate and what this mean from my cost of goods for us and we work through a process of coming with a win-win situation for both us and our vendors to move forward as a larger combined company that will have some favorable benefit to our gross margin performance. And Tom you might speak to it from a timing standpoint.

From a timing standpoint Seth, we are not prepared to give that information now. There is a number of items that from A&I trust standpoint until we're a combined company we will have access to. Our assumptions based on the information we have is... it was going to take period of time. Some of the items where we have like products or the exact same product come a lot faster, to some extent we will... ultimately we will see the total synergies until we beat up the distribution center and implement it through our pool way of doing business. So, it's going to take a period of time.

Okay. Fair enough. I appreciate it.

You bet. Thanks, Seth.

At this time we have elapsed for question. I would now like to turn the call over Mr. Henslee for any closing remarks.

Okay. Well, I just want to say thanks for everyone's time this morning. You can bet that during the second quarter, team O'Reilly is going to be working very hard to generate solid results and we look forward to reporting our second quarter performance in July along with an update on the status of our acquisition of CSK. Thank you very much.

This concludes today's conference call. You may now disconnect.