O'Reilly Automotive, Inc. (ORLY) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Automotive 2011 First Quarter Earnings Release Conference. [Operator Instructions] Thank you. Mr. McFall, you may begin your conference, sir.

Thank you, Tamika. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement. The company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 contained within this conference call, if they are not historical facts, are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future 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 increased debt levels, credit ratings on our public debt, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses including the acquisition of CSK Auto Corporation, 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, 2010, for more details. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts first quarter analyst call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Ted Wise, our Chief Operating Officer. David O'Reilly, our Executive Chairman, is also present. First, I'd like to again start by congratulating all of Team O'Reilly on the outstanding results in the first quarter. Our performance across most markets bounced back nicely after a bit of a slow start in January, and I want to say thanks to all of our dedicated team members for their continued commitment, focus and most importantly, for the incredible customer service we offer our loyal customers every day. Generally speaking, we're very pleased with the performance of our company in the first quarter. As I mentioned on our fourth quarter conference call, January started off a little slow for us related to some major winter weather events in some of our markets. The sales for the quarter progressed nicely in February and March, and we were able to exceed our first quarter comparable store sales increased forecast of 3% to 5%, generating a 5.7% increase in comparable store sales. We saw solid sales increases across most areas of the country, both core O'Reilly and converted CSK markets. The CSK converted stores continue to be some of our best performing markets when looking at comparable store sales, with stores that have been converted the longest performing the best. We're now well down the road with the CSK conversion process, having completed our Western distribution capability expansion and conversion of computer systems, inventory changeovers and are nearing the completion of our store resets and signage changes. By midyear, we'll be completed for the most part, and we'll retire the Checker, Kragen and Schuck's brands, as we have already done with the Murray's brand, and we'll focus all our advertising and marketing efforts on building the O'Reilly Brand. July 11 for this year marks our third anniversary of the CSK acquisition, and I want to commend Team O'Reilly on the incredible job we've done managing the integration. It's been a huge effort on many fronts: distribution center openings, conversions and relocations, inventory conversions, computer system conversions, training, more training, store resets, signage, you name it. Most members of Team O'Reilly have had a hand in some part of the integration effort, and I think we're all very pleased with the results to this point. Our company is now in a position to expand even more opportunistically coast-to-coast, and we're currently looking at expansion opportunities in many markets as we work to open 170 new stores this year and plan next year's growth. In addition to generating comparable store sales of 5.7% on top of the 6.9% increase we had last year, our first quarter performance was encouraging on many fronts. First, we're pleased with our gross margin performance improvement to 48.4% of sales. This is a 13-basis-point improvement over the same period last year and is reflective of the extensive efforts we're putting in to managing our gross margin as we aggressively expand our sales to professional customers in the converted stores. I think it goes without saying that the comparable store sales growth on the professional side of our business is outpacing our DIY growth in the conversion markets. This business generally generates a 400- to 500-basis-point lower gross margin rate compared to the DIY side, and we're working very hard to mitigate the effect this growth could have on our company-wide gross profit percentage by doing more analysis to drive our market-specific price variations, more competitor shops and, very generally, using more science and software capabilities in sales analysis, margin analysis and price setting. These efforts are yielding solid results and should benefit our company over time as we continue to enhance our pricing and margin management systems. Providing industry-leading distribution capabilities, while our DC teams practice strict expense control was another key contributor to our gross margin performance for the quarter. We're also very pleased with our operating expense results that we were able to generate in the first quarter. SG&A as a percent of sales came in at 34.2%, a 91-basis-point improvement compared to last year. Actively managing our SG&A to deliver these outstanding results comes on many fronts, including the completion of much of the CSK store computer conversion activity, better focus on individual sales productivity in our converted stores, solid scheduling and payroll management and just relentless management of all our operating expenses, the result of our consolidated efforts, generating an all-time high first quarter operating margin of 14.2%, a 105-basis-point improvement over last year. At the same time, we're making headway with our efforts to dial in our converted store inventory coverage in reduced excess investment. Directly following the acquisition of CSK, we were very aggressive in deploying inventory and assuring the acquired stores had access to the products they needed to turn around the negative comparable store sales trend they were on. Now that we have our supply chain strategy fully implemented, we're tailoring our inventories in the acquired stores to execute our door market strategy with the same effectiveness we do in the core O'Reilly markets. With many of the acquired stores now having access on a same day basis to distribution center or hub store inventories and all stores having at least overnight access to distribution center inventory coverage, we're strategically decreasing our inventory in many of the converted stores. These efforts yielded a $22 million reduction in our inventory during the first quarter while, at the same time, we opened 43 net new stores. Our efforts to reduce excess inventory are now well underway, and should continue to yield solid results during the remainder of the year. Our goal is to incrementally, over time, return to our pre-CSK inventory turnover rate of approximately 1.7x as we dial in inventory levels and work to increase our per unit volume of the converted stores. As I mentioned when we reported our fourth quarter results, now that much of the conversion activity is completed, we're back to focusing on strategic priorities that will drive long-term value. I will review each of these priorities, but just want to mention a couple of the opportunities we see to improve the operation of our business, things like more detailed work with our vendors on a wide array of projects to assure appropriate future inventory coverage, best use of capital in deploying inventory, logistics cost management, improved demand forecasting, along with several other priorities. We're very pleased to see that our efforts to improve use of capital yielded a 7% improvement in our AP to inventory ratio, taking it from 41.8% of inventory last year to 48.8% this year. Other priorities include fully implementing improvements we've seen we've made in our ability to optimize our gross margin on display area merchandise; also, more product content in auto repair information in our point-of-sale systems in addition to other enhancements we're making to our point-of-sale systems to improve the level of customer service we offer our customers: also, continued e-commerce improvements and further penetration, both on our retail website and professional customer systems. We feel we've done a good job for a long time with our professional customers in this regard. They are continually looking to make enhancements. On our retail website, we see continued opportunity to help improve our retail customer relationships with use of mobile devices and other improvements to help our retail customers leverage our technology to maintain and repair their vehicles, and we currently have a lot of work underway in this area. There's a long list of additional internal priorities. I just wanted to convey just a few of these things that we're currently working on to improve our operations, profitability and market penetration. Clearly, we have a lot of opportunity to grow our business through market share gains with incremental improvements we can make across our company, along with the opportunity we're taking advantage of in the CSK conversion stores to fully execute our dual market strategy. That effort is fully engaged and underway, and we continue to see good results and would expect those stores to continue to generate better than the industry average comparable store sales for some time to come. Our industry has had benefit of a significant tailwind for quite some time now. Average age of vehicles on the road reaching record highs, along with miles driven increases, have been the primary drivers. In 2010, there was right about 3 trillion miles driven in the U.S. Through the end of February, miles driven for the year were up 60 basis points over last year, with average fuel prices in the U.S. at $3.34 per gallon, up 27% from the same time last year. Since the end of February, fuel prices have increased another 14% to $3.82 per gallon on average. So there's no question that our customers' pocketbooks are being squeezed. It's hard to know how this will play out over the summer, but one would assume that miles driven increases will most likely soften and new car sales will also soften as discretionary spending decreases. Fortunately, most of our sales are not discretionary, and with the average age of cars and light trucks on the road in the U.S. well over 10 years and increasing, coupled with our opportunity to gain market share in many markets even with the tough compares we had from last year, we feel confident in our ability to generate solid comparable store sales growth this year. With all of that in mind, including our comparison to the 7.9% comp generated in the second quarter of last year, our comparable store sales guidance for the second quarter is unchanged from the first quarter at 3% to 5%. We're currently on a trend that would put us in that range for the quarter. In closing, I'd just like to, again, say thanks to all of Team O'Reilly for all their hard work and commitment to our culture values and industry-leading customer service. I know we're all very excited about what the future will bring, as we continue to expand the O'Reilly Brand across the country, fully execute our dual market strategy in the conversion markets and work to gain market share using the enhancements we're making to our customer service capabilities. I'll now turn the call over to Ted Wise.

Thanks, Greg, and good morning, everyone. I have to admit that it feels strange to not be announcing another opening of the new DC or computer conversions at several hundred stores during this past quarter. In the past two and a half years, we accomplished many significant projects involving the installation of our new distribution network throughout the West Coast, converting all product lines, upgrading store inventory levels and changing the stores to our new computer system. We are now almost finished with the final phase of our store reset programs in completing another 243 stores this past quarter and having the last 200 scheduled for this quarter. This will complete the interior remodels and have all the stores changed over to the O'Reilly planograms in the interior package. We currently have approximately 1,000 stores exterior signs converted over to the O'Reilly Brand and the final group scheduled to be completed by midyear. With the exception of this last group of store resets and sign changes left to do this quarter, we now have all aspects of the physical conversion to the O'Reilly dual market sales model in play. This has required a tremendous amount of planning and coordination throughout all the various departments as well as a heavy workload in the stores and distribution center, and we truly appreciate the hard work and commitment on the part of everyone involved. At the store level, our West Coast sales teams are quickly moving from a conversion task mode into an execution sales mode. As our store team members gain more experience in time with the O'Reilly system, our service levels improve and our store productivity increases. Without question, the past 2.5 years have been very challenging and often difficult for our store teams with all the inventory tasks, store resets and the new computer and operating procedures that had to be adopted. We are proud of their commitment and support of all these changes that had to take place. But most importantly, even with all of this past activity going on, we still focused on customer service and using the new sales tools to turn the previous negative sales trends into profitable sales growth. Now that we are finishing up with the transition work, it's pretty exciting to experience the growth and realize the opportunity ahead of us now that we can be 100% focused on growing the business and executing the O'Reilly business model. We now have the inventory levels, the distribution support and the market competitive pricing, supported by our First Call program to build the professional sales and a great retail advertising and marketing program to build the O'Reilly Brand. At the store level, team member training and store productivity continues to be a key area of focus. Building our store teams and having the professional parts experience and leadership at the store level to provide a great and consistent service level is our management's highest priority. We are finalizing the transition in the field to our O'Reilly sales and profit incentive program for store managers and territory sales team. Now our team incentive are all store team members. This incentive program plays an important role in motivating and rewarding our Team Members for going the extra step and providing great customer service and improving store productivity. Another important part of our management development program for our store managers and territory sales managers, as well as our district managers, is to bring them into the corporate setting for a development training for a week, which gets them exposed to all the various departments. This has proven to be an effective part of their orientation to our O'Reilly Culture as well as a comprehensive understanding of our business model and how to effectively execute it as a manager. The store sales and promotion activities on the West Coast are progressing well. On the retail side, our advertising is moving to an O'Reilly-only brand versus the co-brand, as our exterior signs are changed to O'Reilly. We have also increased our amount of radio advertising as we move to the level of print that the O'Reilly flyer program has always been on in the core stores. And we are using both radio and print to improve our image of competitive prices and great hard parts inventory coverage. As the stores are being reset and the interior remodels finished, the customers are experiencing new improved store image and appearance as they shop our stores. And most importantly, our team is much more comfortable and trained on the new computer system, and we are focused on improving our scheduling coverage on nights and weekends to ensure that we have the appropriate service levels in our busy retail hours. Our First Call sales teams continue to build solid relationships and work hard to earn the professional customers' business in our Western stores. We know that with time and the opportunity, we have the tools and programs should be a great supplier and business partner, and we are confident that our professional sales will continue to grow as our stores' teams mature and we improve the parts knowledge on our first call counters that is so critical to providing the high service levels for the professional customer. Now to give a brief overview of our new store expansion activity in the first quarter. We were slightly short of our estimates for the first quarter due to some winter weather issues on our construction schedules. We opened 55 new stores and closed 12 stores on the West Coast, most of which were part of the planned CSK store closing and consolidations that we previously announced. This gave us a net 43 store growth for the quarter, and we are well on schedule to reach our expansion goal of adding 170 stores this year. Key growth areas included Ohio with 10 new stores, North Carolina with 8 stores and Texas and Wisconsin having 5 stores each. In all, our expansion touched 19 states, including our first store in West Virginia, now putting O'Reilly in 39 states. In addition to the new installations, we relocated 2 stores and had 8 major renovation in building additions to existing stores as well, as I had mentioned earlier, completed the 243 Western store resets and remodels. I might mention, our expansion did include the acquisition of a 3-store chain in North Carolina, which helped us enter these markets with a nice sales base and very seasoned and experienced group of Team Members. As in the past, we will continue to look for good opportunities to acquire individual part stores or small chains of stores that helps our growth and consolidates the market. We also held our 2011 Manager Conference in Nashville, Tennessee in February, which brought together all store district and regional managers as well as our field sales team and many members of our corporate management team. The managers participated in 5 hours of vendor-related sessions, 3 hours of trade show and 2 hours of vendor sales tips. There was also 5 hours of internal sessions focused on awards presentations, profitability, team member development and leadership, along with some upcoming computer enhancements at the store level. It was a very successful conference, and our teams returned to their market with a high level of enthusiasm and ready to make 2011 another record year for the company. Most of what I covered today has been in regard to the update and success of our conversion activity in our new Western divisions. I certainly want to add that we are very proud of the superior performance and great results we continue to produce throughout our core O'Reilly stores and distribution centers. Our stores continue to grow market share due to successful execution of our dual market sales plans, while practicing discipline, gross margin management and aggressive expense controls throughout the organization. At the store level, we continue to improve store team member productivity while having a goal of providing the best customer service levels in our markets. The overall result of our teams' effort is defined by our 5.7% comp performance and the 14.2 operating profit last quarter. We want to thank all Team Members at O'Reilly for their contribution to our company's success, and we look forward to a great year ahead of us. I'll now turn the call over to Tom.

Thanks, Ted. Now we'll take a closer look at our first quarter results and the guidance for the remainder of the year. After a slow start to the quarter, sales ended the quarter on a more solid trend, resulting in comparable store sales of 5.7%, which exceeded our guidance of 3% to 5%. For the quarter, sales increased 8% to $1.4 billion. The sales increase for the quarter of $103 million was comprised of a $71 million increase in comp store sales, a $35 million increase in noncomp store sales, a $1 million increase in noncomp nonstore sales and a $4 million decrease from closed stores. For the quarter, ticket count and ticket average contributions were roughly even. The trends for the quarter were similar to the prior year, with the increase in ticket count driven by the trend of consumers continuing to retain and maintain their existing vehicles and the increase in ticket average, the result of our product mix trending towards hard parts, which typically carry a higher average ticket. Our total sales guidance for 2011 remains at $5.7 billion to $5.8 billion, and our comparable store sales guidance is unchanged at 3% to 6%. While we do expect some headwind from rising gas prices, we expect sales to remain relatively solid based on the continuing economic pressure on consumers to maintain their existing vehicles and the solid growth potential we have in the acquired CSK markets. Gross profit for the quarter of 48.4% of sales was up slightly from the prior year and within our expectations. While we have seen some inflationary pressures on some of our products, the impact for the quarter was neutral with our LIFO reserve only changing $200,000. The first quarter is historically our lowest gross margin percentage of the year based on sales volumes and mix, so we're comfortable maintaining our annual guidance for gross margin of 48.4% to 48.8% of sales versus 48.6% in 2010. While we do anticipate further inflationary pressures, we expect the pricing environment in the industry will remain rational and inflationary pressures will be effectively passed on through to the consumer. SG&A for the quarter was 34.2% of sales versus 35.1% in the prior year. The improvement was driven by improved leverage on store occupancy costs, improving store payroll efficiency, positive results on health benefits and improved leverage on headquarters expense now that we have completely consolidated the Phoenix office. These efficiencies were partially offset by increasing fuel costs related to store delivery vehicles, and we would expect these headwinds to continue throughout the year. When we look at SG&A average per store for the first quarter, we are able to limit the increase to 1% through tight expense control. For the full year, we continue to expect to see average per store SG&A increase in the low single digits as we leverage store occupancy costs in the acquired CSK stores, leverage headquarters expenses and benefit from the reduced store project costs related to conversions and training. Operating margin for the quarter was 14.2% of sales, representing a 105-basis-point improvement over the prior year, as we saw strong sales leverage on solid sales, coupled with tight expense control. Based on the results from the first quarter, we are raising our full year operating margin guidance from 13.9% to 14.4% of sales to 14.1% to 14.6% of sales versus an adjusted operating margin of 13.6% in 2010. Adjusted diluted earnings per share for the quarter, which excludes the cost of our January-February financing, was $0.83 per share, which represents a 19% increase over the prior year. As discussed in our fourth quarter conference call, we refinanced our debt in January of this year. In summary, we issued $500 million of 10-year public bonds with an effective interest rate just under 5% and entered into a new $750 million 5-year revolving banking facility. We used the proceeds from the issuance of the bonds to retire our asset-backed loan. As a result of this refinancing, we recorded a $26 million charge in the first quarter of 2011 to write off an amortized ABL financing cost and to terminate the interest rate swaps associated with the ABL. We will treat this charge as an onward creating item in 2011. During the quarter, our adjusted debt to adjusted EBITDA are increased slightly from 1.6x to 1.7x but remains well below our long-term targeted leverage range of 2.0x to 2.25x. We remain very committed to maintaining our investment grade ratings. Looking at our balance sheet at the end of March, two things stand out. First, we are sitting on an unusual amount of cash for us, which we'll discuss in a moment; and second, we are making progress in improving our net inventory turns. Reducing our per store inventory and improving our vendor terms both represent great opportunities for us to improve our net inventory turns. During the quarter, we opened 43 net new stores, and we're still able to reduce overall inventory by $22 million. On a per store basis, inventory at the end of the quarter was $554,000 versus $567,000 at the end of last year. While we do not anticipate returning to the sub-$500,000 per store inventory levels we were at prior to buying CSK, we do anticipate over the next several years to see substantial reductions in our per store inventory as we continue to work hard to refine the mix and depth of inventory at the converted CSK stores and new DCs. For the year, we continue to believe we can add 170 new stores with only a small increase in gross inventory. At the end of the quarter, our AP to inventory ratio was 48.8% of sales, which is a tremendous improvement over the first quarter of the prior year and December of 2010, which were 41.8% and 44.3%, respectively. A portion of the improvement is due to temporary timing differences related to transitioning into spring, but a portion is the result of permanent improvements in payable terms, which we would have been able to negotiate with our vendors as a result of our improved vendor financing program. We have been able to enhance our program to reduce supply-chain costs based on our new unsecured debt structure. We expect to continue to increase our AP to inventory ratio over time. Cash flow from operations improved to $123 million over the first quarter of last year, which represents a 72% increase. This strong improvement was driven by increased adjusted net income and improvements in net inventory investment. Looking at capital expenditures for the quarter, our spend of $94 million was slightly higher than prior year. For the full year, we still expect to spend between $310 million and $340 million. The strong improvement in cash flow from operations, coupled with CapEx spend in line with last year, drove a significant improvement in our free cash flow. The first quarter free cash flow of $200 million was a $120 million improvement over the prior year. For the full year, we expect free cash -- excuse me, for the full year, expected free cash flow guidance, we are increasing our guidance from $320 million to $350 million to $360 million to $400 million. This increase in guidance is based on first quarter results, offset in part by the before-mentioned temporary timing difference in AP payments, deferral of planned CapEx out of the first quarter into the second and third quarters and the deferred timing of some planned payments. Based on our strong first quarter free cash flow and the approximately $145 million of cash generated from our January bond offering, we are able to buy back $145 million of stock during the quarter and still end the quarter with $230 million of cash on the balance sheet. On an ongoing basis, our intent would be to carry our minimum amount of cash in the balance sheet, which ranges from $20 million to $40 million and use our undrawn $750 million revolving bank facility for short-term liquidity needs. We continue to believe the best use of the cash flows generated by operations is to reinvest in the business by opening new stores and continuing to consolidate the industry. To the extent we do not use all the cash flow we generate by opening new stores with the appropriate returns where we can have consolidated industry via accretive acquisitions, we will return excess cash to shareholders by opportunistically buying back our shares. During the date of this call, we have repurchased a total of $200 million of shares and have $300 million still outstanding on the current board authorized share repurchase program. Our guidance for both the second quarter and the full year takes into account the shares repurchased through today but does not reflect the impact of any potential future share repurchases. For the second quarter, our diluted earnings per share guidance is $0.92 to $0.96 per share. For the full year, our adjusted diluted EPS guidance, which excludes the nonrecurring charges related to refinancing plan I mentioned previously, is $3.49 to $3.59 per share. The first quarter results were a good start to the year, and we look forward to continuing that momentum throughout the rest of the year. At this time, I'd like to ask Tamika, the operator, to come back, and we'll be happy to answer your questions. Tamika?

[Operator Instructions] Your first question is from Gary Balter of Crédit Suisse. Gary Balter - Crédit Suisse AG: Given that you're retiring the Checkers brands, the CSK brands, are you planning to sell these left over inventory, your left over names on eBay?

We haven't planned that yet, but that maybe a future cash flow opportunity. Gary Balter - Crédit Suisse AG: Good. We'll put it in our model. Expenses only grew 5% for the quarter. Was there any timing issues in that, or is that something that's -- like that was your best quarter you've had for a long time. Obviously, you're past a lot of the big spending. Is that what we should be thinking going forward?

We had a great quarter on expenses. What I think what reflects is a couple of things. One, that we're not spending all these dollars on training and conversion. And that two, our store operations group has really worked hard on productivity per team member, and how do we grow sales and drive sales results using our payroll dollars wisely. Gary Balter - Crédit Suisse AG: So is that a yes?

We would expect to continue to see very good leverage on SG&A. Maybe not quite as good as we saw in the first quarter. Gary Balter - Crédit Suisse AG: And you made some comments -- you had some comments on the macro, obviously, and the impact of gas pricing. If you break out the CSK stores, you may not want to answer this, but if you just look back at the O'Reilly stores, where you don't have the benefit of doing all the distribution and growing in the contracts side, what's happening as gas pricing goes up? Are those comps positive?

Yes. The CSK stores are -- I mean the O'Reilly stores are comping well. They're not comping as good as the converted markets but we're very pleased with the way they are comping. Now the things it's hard to compare currently to what happened when gas prices spikes so abruptly -- the last time they did this is that the cars are that much older. At least the average age of cars is that much more. So the miles driven really generate more productivity in our business or our industry than what it did previously. So I guess what I was alluding to in my prepared comments is it's kind of hard to predict how this will play out if gas prices get to $4.50 or whatever it is they're projected to get to this summer. Because I think we would expect miles driven to soften, whether they flatten or go negative is unknown. But the miles driven that do sustain generate more productivity for our industry. So it's kind of hard to see what's happening. But to answer your question directly, yes we're happy with the core O'Reilly comparable store sales. The converted market comparable store sales are better. But we're very pleased with the way stores are doing. But we refrain from giving the specifics on what our comps are by geography or by distribution channel.

Your next question is from Collin McGranahan of Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: First, just to follow-up a little bit on the cash discussion. I think when you reported last you said in January despite the weather you were in the range for the quarter 3% to 5%, and if you ended up at 5% to 7%. Looks like February, March was somewhere in the 6.5% to 7% range. And if you're back within the range, it seems like there's a pretty good deceleration here in April, maybe back to 3% to 4% from a prevailing rate of 6% to 7%. We've seen gas prices go up I think for 35 consecutive days in a row and gas shipments, which track pretty well with miles driven, are now fairly negative in the last several weeks. What have you seen kind of as you've come through March and into April and really started hitting this day after day after day of higher gas prices. What have you seen in the trend in the core business?

What we've seen is just a kind of a steady incremental ramp up of business that we see each spring that can be temporarily disrupted by short-term weather events like in the tornadoes and thunderstorms that have been persistent in the middle and the Eastern part of the country the last few days can be a little bit disruptive. But we've seen a steady ramp up of business. The variations that we've seen are probably most driven on a this year's comp basis by the week we had last year. There was some pretty significant variations in the comps that we had on a weekly basis last year for the quarter that we're in. And the comp trends had been very steady, or at least the sales trend has been very steady. The comp numbers are affected more so than anything by what we've see, by what we're comparing to. So we think that the range that we gave is a reasonable range. And we've not seen any abrupt change in the trend that we're on as a result of gas prices having increased yet. Not to say that, that won't happen. We haven't seen it yet. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: Substantially, on your daily run rate, you're seeing pretty steady day-to-day business and it's just a matter of what the year ago looks like.

That's exactly right. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: And then second question on a pretty phenomenal working capital performance and free cash flow performance. You're now in the unusual circumstance of having a lot more money than you know what to do with. And so why not a dividend at this point?

We still look at the opportunities within our markets both to aggressively grow stores and also to consolidate the industry, and see a lot of potential out there. We were still a fragmented industry. We would like to maintain our flexibility to go out and quickly, and aggressively when the opportunity presents itself, consolidate the industry. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: Well, Tom, I think you said in the past though, the largest acquisition you could contemplate given the available opportunities, is a couple of hundred million dollars. Is that changed?

The change that are out there are smaller and they're in that range. What we want to do is balance, being very committed to continuing to be investment grade rated, and having the flexibility to do those. We're currently below our leverage target by a good amount but we want to walk into those slowly over time. So...

And something I would add to that, Colin, is that we feel like we're still a very opportunistic growth company. And while to your point, there's many of the companies that we could potentially acquire over time are relatively small companies and can be funded to a large degree with our facility and cash flows. Our thought right now is with us being still a relatively young growth company, although we've grown to being the second-largest chain in the U.S., we don't want to lock ourselves in to a long-term dividend obligation yet. That will be a discussion that our board will have ongoing overtime, and that may be where we end up at some point. But right now, we feel like share repurchases are the best way to reward our shareholders or to utilize our excess cash to reward our shareholders and that dividends maybe something that we pursue in the future as our company continues to mature.

Your next question is from Dan Wewer of Raymond James. Daniel Wewer - Raymond James & Associates, Inc.: Tom, the rate that you're increasing the payables, the inventory level is increasing a lot faster than we had expected. I know that these bigger finance programs only pay off once you buy inventory, and you guys only turn your inventory about once every 200 days. Can you give us some kind of a target for where that payable inventory rate could be four quarters from now or two years from now.?

Two years from now is an easier target to give you. When we look at our vendor base and our mix of products, we would target right now where we sit today in the 60% to 70% range over the next couple of years. When we look at this specific point in time in March, the 48.8% is a very good number. When we transition out of the winter into the spring, just based on the churn of inventory, our AP to inventory ratio climbs from a low point in January to a high point in the middle of the summer and timing of purchases and special -- maybe on uncertain purchases can affect our first quarter AP, that inventory ratio quite a bit. And that's why when we look at where we're at, part of it is going to be permanent, and part of it is transitional based on rolling into the summer. Daniel Wewer - Raymond James & Associates, Inc.: Okay and then the, I guess the other question I had, on the operating margin guidance, that you bumped up 20 bps from the initial guidance. Is that reflecting greater SG&A opportunities or is it reflecting an opportunity to improve gross margin rates that Greg was alluding to?

We're pretty close on where we thought we would be on gross margin. It reflects the results from the first quarter and having a positive outlook on managing SG&A. Daniel Wewer - Raymond James & Associates, Inc.: So it's more -- that's why the extra 20 bps versus margins on the forecast is originating. It's more on the expense line?

Yes. And over the long term, that's our opportunity, our biggest opportunity, we feel, to drive operating margin is to continue to be more and more efficient with our SG&A. Daniel Wewer - Raymond James & Associates, Inc.: I just want to make sure I understand, on the gross margin difference between commercial and do-it-yourself, that you noted was about 400 to 500 basis points. Has that changed one way or the other during the last two or three years?

No. The spread stayed pretty close. There's always been a spread or somewhere between I'd say 300 and 500 basis points. And depending on the market that you're in, you can have a -- you can be at a market where you have an aggressive, what we call them, two-step operations. But they're just under hardware houses that buy directly from manufacturers and the low operating expense and price can get eroded in those markets pretty well and you'll have a more of a spread there than you would in other markets. But on balance 400 to 500 is pretty consistent with what it's been for some time now.

Your next question is from Scot Ciccarelli of RBC.

I guess my question is, as you've ramped up the commercial sales efforts in the CSK stores, have you been able to maintain the sales run rate in the Retail segment or is that -- the Retail business in those stores, is it increasing, has it decreased because you've put more emphasis on the commercial? What's the right way to think about that?

Well, all of this, as we try to categorize our cash sales or charge sales, there's -- we all -- 8 different perspectives on the way we look at what's cash and what's charge. CSK, as a company, had a different perspective than we have on that. And for that reason, for our internal reporting, some of the accounts that they considered to be what we would consider to be a cash sale, they consider to be a charge or a professional sale. So for that reason, our comparisons are a little bit off. Once we anniversary those odd comparisons, both sides are growing well. From an internal comparison standpoint early on, it appears as though our charge sales are significantly outpacing our cash sales. But that's really not the case. It's a little bit of a re-categorization issue. So what I would say is, is that our cash sales are growing. We're comping positive. We'd like to be comping a lot better on the cash side. Our charge sales are comping extremely well.

Scot, this is Ted. As I mentioned in my comments, the stores have been in kind of a state of transition in the front floors, due all to resets and remodels of planogram changeovers. A lot of retail clerks and new computer systems. So to be where we're at right now on the retail business, we think is really good, and look forward to the next year, two, three as we continue to build the O'Reilly Brand, increase the hard parts sales out of those stores. And again, we're evolving from basically an oil accessory on sale customer to an everyday low price hard parts customer, and not that we don't want to continue to do all the business that CSK was doing but add to that. So again, this year, our stores are going to really start looking a whole lot better from an image and appearance and signage and customer service levels. And we really see a big opportunity to Retail business in addition to the Wholesale business.

That's helpful. But Greg's comments also seem to suggest there was a -- I read it this way anyway, that there was a widening in the sales performance gap between the DIY and the Commercial business. I guess the question is, A, is that correct? And B, is that a function of gas prices or is this simply a function of what's currently going on with the CSK that you just alluded to?

Let me add this to what I said, Scot, because I'm trying to refrain from just telling you exactly what the numbers are, because we don't want to do that. But on the core O'Reilly side, both the charge or what I'll call professional sales and DIY sales, the comps are pretty close. They're not that far apart. On the CSK side, what would be the converted stores, the professional sales are comping much better than the DIY sales. The point I was making about the spread is simply a matter of categorization with inside our company. We've not spent a lot of time trying to go back and recapture the way CSK measured it to try and see exactly what our number would be under their measurement. So it's not widening. The number's coming closer together when it comes to cash, to DIY to professional sales comparisons. So we spread between the two and the CSK conversion stores. It was wider when we originally bought the company and started our commercial programs because we had early big wins on the commercial side that were just a result from having inventory in the stores and it's taken longer to bring the cash sales up to speed. One of our biggest future opportunities is to be a better provider to the DIY side. So that gap is narrowing incrementally.

Your next question is from Tony Cristello of BB&T Capital Markets. Anthony Cristello - BB&T Capital Markets: Greg, you went through several initiatives that you sort of -- whether it's near-term or longer-term. I wonder if you could maybe prioritize the sort of top two things you'd like to accomplish for the balance of the year, particularly now that it seems like the heavy lifting of CSK and conversion process is out of the way?

Yes, I would put those, I would just say the three things that would be most important are some enhancements that we want to make to our point-of-sale systems, that will further enhance the content we use at point of sales to help both our do-it-yourself customer and our professional customers in just us managing the transaction and helping them with the products they're looking for, more pictures, diagrams, repair information, diagnostic information, things like that. That's a real important priority for us right now. We're focusing a lot of the effort on that. Behind that, would come a combination of our supply chain efforts just working with vendors to make sure that we're being as efficient as we can in our supply chain that we're acquiring products from the right companies, the right countries and that we're as efficient as we possibly can be from a supply chain perspective. In addition to that, that we're preparing for the future, is the car sales continue to migrate towards more import labels than domestic labels. Now I read the other day that the speculation was that as the import or gas prices continue to progress where they're projected to progress to, that import car sales could exceed half the car sales in the U.S. this year. That's happening. It puts us in a position that I feel like we need to do a better and excellent job and being a parts provider for import cars, especially some of the European brands that appear to be serviced by import specialists and shops that are not the typical domestic car shops. So part of our supply chain effort is to work and make sure that we're in a good future position for that. Margin management would come in behind that. We were just trying to use more science and technology to optimize the way we price, the way we evaluate sales, the way we evaluate market baskets, the effects of promotions, what goes along with the item when we are willing to give away, motor oil and whatever the case may be. That would come behind that. And then behind that would just be our ongoing improvements that we're making in e-commerce to manage relationships with do-it-yourself customers to be the easiest partner to do business with on the professional side and to make sure that we're adding value to those transactions with our professional customers by making it easy for them to give the estimates that they need to give, to have access to the information that they need to have, to give us -- to diagnose vehicles and things like that. Anthony Cristello - BB&T Capital Markets: It seems like the point of sales efforts are certainly geared more towards the do-it-yourself side of the business. Is that a fair assessment?

Yes. They are useful on both that they're more useful on the do-it-yourself side than they are on the do-it-for me side. Anthony Cristello - BB&T Capital Markets: And historically, as you've been heavier weighted towards the commercial, is there something that you felt you were lagging? Traditionally, a 50-50 split, but I mean that's just something playing catch up. Is there something you see on a go-forward basis that you feel like you can be more competitive in your markets to take advantage of some of that technology at POS?

Well, I think, Tony, that when you look at just through the most successful companies in our business, who's doing the most volume per store retail, things like that, it's clear that we have an opportunity, a significant opportunity to do more Retail business on a per unit basis. And the things that we think will help get us there are some of the marketing and advertising things that Ted said, just making customer's aware of the rest of inventory, the quality of products, the professional help we have. The one thing that I think significantly helped, and we're well down the road with this today because we've made incremental improvements as have our competitors and the information we use at point of sale. One of the things that I think can help us be a better DIY provider is just the information that we can put on our front counters to help our least tenured team members be better parts professionals. Just to give them the information that these customers, that really don't know a lot about repairing their cars. Given the information right there on the system that can help them make buying decisions while they're in the stores, help them make diagnostic decisions as to what parts they may need to be looking at. And then also to make sure that when they leave the store, they've got everything they need. If there's a special tool that they need to get their drain plug out of their manual transmission or whatever the case may be, we want to make sure that we're able to provide the information to recommend that item while they're there as opposed to sending them away with the fluid they need to change their transmission oil, only to realize that they don't have the tool at home to take the drain plug out. We'd like to sell it to them while they're in the store the first time. So those kinds of things are the kinds of things we're trying to focus on.

Your next question is from Mike Baker of Deutsche Bank.

I'm going to ask, if I could, one short-term, one long-term question. In the short-term, can you describe what the impact of some of the weather in April, may have been the tornadoes, et cetera, and how the comparisons will shake out through the second quarter from a year ago? And then the long-term question, I think in the past, you've talked about the CSK stores getting to $1.8 million by 2013 due to the growth in the commercial business. Can you talk about that outlook. Do you feel more confident in that after not having all those stores converted, less confident? Should it potentially be higher than that even?

First, on weather, this thunderstorm and tornado activity and just monsoon-type rain in the center part of the country has not helped business short term. We continue to comp okay, we'd comp a lot better had we not have these weather events. So there's no question that there's a little bit of a short-term delay in some of the business we've been doing in springtime as a result of that.

One of the are the advantages, of the many advantages, of having purchased CSK is this would have been a much bigger impact on us pre-CSK because of our geographic intensity in the middle part of the country in the Southeast part of the country. A largest hit the West Coast, hasn't been affected by these storms. So that's a positive for us for balancing that across what our weather impact is. So it will all wash out in the spring business as it would normally kick in really strong. Really hasn't happened as much yet is what we will see here in this the next couple of weeks as spring really arrives.

So weather having a bigger impact than gas prices, you think?

It's hard to say. No question in some markets where they've had some extreme weather, that it's certainly had a bigger effect than gas prices. The gas price thing is just really hard for us to measure. The best way to measure it is just with miles driven. If miles driven decreases, then it has to have some effect. The unknown factor in the equation now is that with the cars that much older, how much of effect does it have? So that's hard to say. What I would say is short-term weather has not been favorable so far this spring, but we would put out the change here pretty quick. Long term, the $1.8 million that we've been saying we can get to with CSK, we feel pretty confident that we can get there by the end of 2013. We currently increased those store's averages by onetime a little over $100,000 per store, or something like that. So we're right on pace with where we thought we would be. So yes, we should be there. I think that we were probably a little conservative, maybe, on where we'll end up on these stores on a per average basis. We are looking mostly at the contributor to this to be our rollout of our commercial programs, our professional customer programs. Our big opportunity, as Ted and I mentioned is that we can become a much better DIY provider than we have been or the CSK has been on the West Coast and we're very focused on doing that. To the extent that we're successful there, we'll exceed the $1.8 million.

If I could slide in one more. Your comp guidance is a little bit of acceleration in the back half of the year. Is that because just continuing to gain traction and maturity in the CSK markets or does that have something to do with maybe what you're seeing here with the weather?

I guess if we look at our first quarter results and our second quarter guidance, we wouldn't expect the second half, which has tougher compares to excel from a percentage standpoint. One question I didn't answer that you asked was just about our -- how the quarter lays out from a compares standpoint. The way it lays out, I won't give you the numbers, but it's a tough compares starts some easy in the middle, tough compares in the end.

Your next question is from Matt Fassler of Goldman Sachs.

I want to talk about the impact of pricing in the industry, our studies, and I guess intuition would say that price certainly of commodity products have gone up. You've spoken to some degree to your own emerging price optimization efforts. Can you talk about what impact this is having on sales? And perhaps talk about traffic or transaction count versus ticket trends, and how the complexion of those trends maybe changing as we move through the quarters here?

It looks like, beyond ticket average and transaction count are both about equal contributors to our comp. Tom, I don't know if you had any additional comments about this inflationary effect on our comps.

As we look at our LIFO, which is our last LIFO reserve, we didn't see a big change in the quarter. We did see some pressure on some commodity-based products. But to Greg's point, we continue to work closely with our vendors to try to reduce acquisition costs through exactly the right products. Have it manufactured in the right places. So net-net, we did not see that as a driver to the top line in the first quarter.

And if you think about how the contribution of traffic versus ticket has evolved, those are the most two of the quarters. If you could just remind us what that mix has looked like?

Consistently through last year, we saw both of them driving the top line growth. When we look at the average ticket comp, it's less inflationary based and more based on our mix of products. As we shift the CSK stores to more Professional Installer, more hard parts, more bigger ticket, dollar transactions that's really the driver of the increasing average ticket.

I was just trying to follow up, for the purposes of this analysis, you want to look just at the legacy or other stores that have kind of a level mix as the traffic ticket for O'Reilly there but also tracking the same as it is under [indiscernible]?

Core O'Reilly has been equal contributor on both sides.

Ladies and gentlemen, we have reached the time allotted for questions. I will now turn the call back over to Mr. Greg Henslee.

Well, I'll just close by saying thanks for everyone's time. We're pretty enthused with the success that we've had with the CSK integration. And we'll be working through the second quarter and the remainder of the year to make sure that we reap the fruit of the efforts that we put in place with this integration over the past two and a half years. And we'll look forward to reporting those results to you the end of this quarter. Thank you very much.

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