O'Reilly Automotive, Inc. (ORLY) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Automotive Second Quarter 2012 Earnings Release. [Operator Instructions] Thank you. Mr. Tom McFall, you may begin your conference.

Thank you, Melissa. 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. You can identify these statements 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 that 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 revenue and future performance. These forward-looking statements are based on estimate, projections, beliefs and assumptions that are not guarantees of future events and the results. Such statements are subject to risks, uncertainties, assumptions, including but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental regulations, the company's increased debt levels, credit ratings on the company's public debt, the company's ability to hire and retain qualified employees, risks associated with the performance of acquired businesses, such as 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 annual report on Form 10-K for the year ended December 31, 2011, for additional factors that could materially affect the company's financial performance. The company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts second quarter conference 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 congratulate Team O'Reilly for our continuing success in providing the highest levels of customer service in our industry. Despite the pull-forward of a portion of the spring business into the first quarter, along with the difficult consumer spending environment, we were able to achieve a respectable 2.5% comparable store sales increase and generated 20% increase in earnings per share. This marks our 14th straight quarter of increasing adjusted earnings per share in excess of 15%. Each and every one of us plays an important role in our company's success. Whether your role is in one of our distribution centers, stores, outside sales or here at our headquarters, your contribution is important in ensuring our customer service levels exceed our competitors' and that we operate as productively as possible. Thanks to all of you for your hard work in the second quarter and for the commendable results. Now on to some details about our quarterly performance. As most of you know, our original comparable store sales guidance for the second quarter was 3% to 5%. And when it became clear that we wouldn't achieve the bottom end of that range, we updated our guidance. Based on these softer-than-expected results, I'll go into a little more detail than we typically disclose concerning the progression and composition of our quarterly comparable store sales increase and give some color on our rationale for the third quarter comparable store sales guidance. As we discussed on our first quarter conference call, the beginning of the second quarter got off to a slow start as we suspect a good amount of the spring cleanup business was pulled forward from April into the first quarter, as a result of the earlier-than-normal mild temperatures. We expected May sales to return to a more normal seasonal pattern, and they did. Through May, our comparable store sales results were within our expectations. However, business was significantly softer than we expected in the first 3 weeks of June. This slowdown was chain wide, and we cannot point to any specific cause other than to cite that most of retail seem to have a tough June. And after a strong increase in miles driven in May of 2.3%, we suspect June's number, when reported, will be down. The end of June finished up somewhat better, resulting in our 2.5% comparable store sales increase, coming in at the top end of our revised guidance. From the first quarter to the second quarter, we saw the biggest deceleration in comparable store sales in cold-weather markets, where the early spring weather shifted more business into the first quarter. Since the core stores have a significantly higher percentage of cold-weather market stores, we saw the biggest sequential impact in the core stores. Although these stores did generate positive comparable store sales for the second quarter, the acquired markets continue to generate strong comparable store results with our buildout of the Professional business. Looking from the first quarter to the second quarter, both our DIY and our Professional business comparable store sales increases slowed at approximately the same rate. However, both contributed to our positive comparable store sales gains. DIY comparable ticket count continues to be under pressure with growth in the DIFM ticket account, mostly offsetting the pressure. We continue to work hard to drive more DIY traffic into our stores, and Ted will talk more about that in a moment. As we look forward to the third quarter, we remain cautious regarding the sales environment and are setting our comparable store sales guidance at the 1% to 3% range. The modest improvement we saw in sales at the end of June has continued into July and, we are currently running within the range of our guidance for the third quarter. However, we faced several headwinds in the third quarter, which include an extra Sunday during the quarter, which creates an approximate 50-basis-point drag on overall comps as most professional shops are closed on Sunday. The comparisons for the third quarter are very difficult as we face a 15.9%, 2-year stack for comparable store sales. And finally, we believe consumers continue to be impacted by constraints on their pocketbooks with a backdrop of economic uncertainty. Despite the difficult sales environment, we continue to focus on growing our sales profitably, and we're able to maintain our momentum on the gross profit line with gross margins sequentially up 10 basis points over the first quarter. Compared to last year, gross profit as a percent of sales increased 132 basis points. This improvement was the result of improved merchandise margins, driven by acquisition cost improvements and our continued conservative and more focused advertised price strategy and strong improvements in the productivity of our distribution centers, which Ted will discuss in more detail here in a moment. Based on our year-to-date results, we now believe we will be in the top half of our full year gross margin guidance of 49.4% to 49.8% of sales. Now I'd like to switch gears and update you on a few of our key initiatives. First, I'm pleased to report we have completed the rollout of our proprietary electronic catalog to all of our stores. The electronic catalog is a critical customer service tool for our store teams to provide comprehensive information quickly to both our DIY and our Professional customers. The implementation of our proprietary catalog has allowed us to expand the applications covered to many more of the products we offer, improve the interface to make the system more easy to learn and use, provide robust product content and add related product sales information, all of which will allow our team members to provide even higher levels of customer service. Recently, I attended a catalog review meeting in Houston with some of our most proficient parts professionals. They're very excited about the functionality of the new electronic parts catalog. As with any new and complicated system, our team has suggestions for additional enhancements, and our dedicated catalog team is working on these suggestions along with our ongoing efforts to add even more rich content to ensure we have the most robust catalog in the automotive aftermarket. We do not expect to see an immediate measurable increase in sales from this implementation. However, we are very confident the increased level of service we're able to provide our loyal customers will result in continued strong sales growth over time. Next, I'd like to update you on our initiative to enhance our store-level inventory availability. We're about halfway through the project to add additional SKUs at the store level. The original estimate of the investment for this project was approximately $80 million of additional inventory. But as we progressed with the project, we have determined that we have additional opportunities to enhance our customer service levels, and the total expected investment now is actually closer to $100 million. Our goal remains to have the parts our customers want on our store shelves even more often than we do today and to rely less heavily on pickups from our hub store and distribution center network. The last initiative I'd like to touch on, in general terms, is our e-commerce strategy. We strongly believe that clear consumer choice for auto parts will remain brick-and-mortar stores due to the immediate need for failure parts, the uncertainty around all the necessary parts needed for repair and the technical knowledge and assistance that can only be provided by an experienced parts professional. That said, the amount of auto parts sold over the Internet continues to increase and offers us an opportunity to enhance our growth. A major initiative for us is to continue to add to the functionality of our e-commerce site, www.oreillyauto.com. We are focused on having a site that not only offers a convenient shopping experience for either home delivery or store pickup, but also provides robust product and repair content that serves as an information resource for our DIY customers and further solidifies their attachment to the O'Reilly brand. We have a solid first half of 2012 -- we've had a solid first half of 2012, highlighted by a comparable store sales increase of 4.9%, a 125-basis-point improvement in operating profit as a percent of sales and a 29% increase in adjusted earnings per share. We remain very optimistic about the long-term future of our business as the U.S. vehicle fleet of 241 million cars and light trucks on the road continues to age and go through more routine maintenance cycles, and consumers continue to gain confidence to invest in repairs of higher-mileage vehicles. Further, recently released Automotive Aftermarket Industry Association fact book, the average age of light vehicle fleet increased again from 10.6 years in 2010 to 10.8 years in 2011. We see this trend continuing as better-engineered and manufactured vehicles justify continued repair and maintenance at higher mileages. We also remain very optimistic in our ability to profitably grow our business. Again, referring to the AAIA fact book, the number of auto parts stores continue to stay consistent in 2011 at between 35,000 and 36,000 stores as it has for the past decade. And we see continued opportunity to consolidate the business through greenfield growth and opportunistic acquisitions. We aren't going to go into specifics on acquisition opportunities, but it's safe to say we continue to aggressively look for opportunities to consolidate the market. In closing, I would like to again thank all of Team O'Reilly for your continued focus on providing outstanding service to our customers every day. I'll now turn the call over to Ted Wise.

Thanks, Greg, and good morning, everyone. No doubt, it was a tougher quarter for business than we've seen in a while. I'd like to take a few minutes to comment on our store team and compliment them to working so hard to maximize our store sales and profitability by providing top-notch customer service while controlling our costs. For the quarter and the year-to-date, our SG&A spend is in line with our expectations. Dissecting our SG&A, the 2 big expenses we can control in the short term are store payroll and our advertising. I'm not going to give specific numbers. But given the tough environment, I would like to spend a little time discussing how we can manage these critical expenses. No expense more directly impacts our level of customer service and each store's ability to grow our business than store payroll, so our store operations teams spend a lot of time managing store staffing and productivity on a store-by-store, day-by-day basis. Our store operations team use a number of tools to manage payroll by store, including detailed productivity tracking by individual team member, our e-scheduling and review system and our individual, incentive-based compensation for every store team member. Stepping back and looking at our business as a whole, we are in the customer service business, and with the level of competition in our industry, the primary reason for both DIY and Professional customers choose to do business is the level of customer service they receive. Providing consistent excellent customer service is critical to building long-lasting relationships with our customers, and it's especially critical on the Professional side of our business. Sudden dramatic decreases in store staffing level not related to normal seasonality of our business have a noticeable and negative impact on customer service. As a result, we avoid dramatic short-term changes to our store payroll even during periods of soft sales. Over time and based on the business trends and sale entitlement, we adjust each store staffing to -- levels to provide excellent customer service and to grow the business while, at the same time, controlling our expenses. It takes a long time to earn a customer's trust and become their preferred supplier for auto parts, and we do not want to jeopardize those hard-won relationships because of a soft month or 2 of business. This is especially true in the acquired markets, where we have done a good job in building the Professional Installer business but where we also have a tremendous opportunity to continue to build market share. We firmly believe our long-term view and philosophy of staffing source to provide excellent customer service with enough payroll to grow the business in both good times and bad times has been a key factor in our ability to consistently and profitably grow business and sales. Now in regarding our advertising program, while for the last year or so, DIY business has been under pressure, and consumers continue to deal with a tough job market, the expiration of unemployment benefits and a general feeling that the economy isn't getting better any time soon. To ensure we continue to build the O'Reilly brand and top-of-mind awareness when customers need parts, we have added national-level TV and radio advertising to our advertising program to increase the amount and frequency of our branded message. In addition, and as Greg mentioned earlier, we have adjusted our current year advertising approach to focus on shorter-duration, call-to-action promotional events. This allows us to offer DIY customers great saving opportunity on high-profile items that increases foot traffic in our stores, while limiting our margin exposure. Our store teams are responsible for providing excellent customer service when customers respond to these promotions, while also adding items to their purchase and ensuring those customers will come back to our stores when they have a hard-part need. Several of these events have been themed events supported by radio, window signs and in-store signage and have produced positive results. And we plan to continue these type of events in the third quarter. In addition, we have continued to get the O'Reilly brand out to new customers with our Motorsports marketing program involving NASCAR and NHRA racing, along with many regional and smaller local tracks across the country. Our grassroots marketing also includes local car shows, farm show and many other local-type community events that O’Reilly can become involved in at the individual-store level. Now I'd like to touch on our distribution operations. The DC operations team has done an outstanding job controlling expenses, especially in light of softer-than-expected sale and along with our store-level inventory enhancement initiatives, while they continue to give excellent level of service to our stores. A significant portion of our year-over-year improvement in gross margin is a result of our DCs operating more efficiently, and this is especially true for the newer DCs as those team members bring their productivity levels closer to our more seasoned DCs. In addition, our DC teams have been instrumental in rolling out our store-level inventory enhancement initiatives. We are approximately halfway through the $100 million project, so the remaining $50 million of additional shipments on top of our normal volume is a huge undertaking. And again, I would like to thank all the DC members for their hard work on this project. Now moving on to our store expansion activities, we opened 50 net new stores in the second quarter, covering 20 states. Texas led the way with 10 new stores during the corner -- quarter as we continue to find attractive opportunities in our largest state. For the year, we have opened 119 net new stores in 28 states. For the year, again, Texas leads the way. But we have significantly increased our presence in Ohio, Michigan, Virginia, South Carolina and Florida. During the quarter, we also relocated 7 stores to new locations and completed major renovations to 15 stores as we work to keep our existing store base well positioned and fresh. For the year, we continue to be very comfortable that we will hit our goal of 180 new stores. Our real estate teams continue to find great locations at good occupancy costs as the difficult macroeconomic environment has put some pressure on real estate prices. We'll also continue to work hard on acquisition opportunities. While I don't have anything specific to report on, we continue to investigate all avenues for the right opportunities to consolidate the industry through accretive acquisitions. To finish up, I would like to thank all of our team members for their hard work, their dedication and most importantly, providing the great level of customer service. Now we'll turn this over to Tom McFall.

Thanks, Ted. Now we'll take a closer look at our results and add some color to our guidance. Comparable store sales for the quarter increased 2.5% on top of the prior year comps of 4.4%, with both DIY and DIFM contributing but more of the gain coming from the DIFM side. In total, the increase in average ticket accounted for the comparable store sales increase with DIY ticket count down, partially offset by increasing DIFM ticket count. For the quarter, sales increased $84 million, comprised of a $37 million increase in comp store sales, a $45 million increase in non-comp store sales, a $3 million increase in non-comp, non-store sales and a $1 million decrease from closed stores. Year-to-date, our comparable store sales increased 4.9% on top of the prior year comps of 5%. Our sales guidance for 2012 is unchanged at $6.15 billion to $6.25 billion. We're revising our full year comparable store sales guidance down from 3% to 6% to 3% to 5%. This revision to the top end of our guidance is based on our cautious feel of sales environment in the third quarter, as it looks like consumer confidence will continue to be under pressure. Gross margin for the quarter increased 132 basis points over the prior year to 49.9% of sales. This increase is consistent with the year-to-date trend of gross profit increasing 134 basis points. As Greg mentioned, we currently anticipate our 2012 full year gross margin will be in the upper end of our guidance of 49.4% to 49.8% of sales. We anticipate the quarterly gross margin for the remainder of your to be slightly down from June year-to-date levels based on seasonal mix. For the year, the improvement in gross margin as a percent of sales has been driven by improved acquisition costs, a more targeted advertising approach and improved distribution efficiencies, and we expect these factors to continue through the end of the year. During the quarter, SG&A delevered by 76 basis points to 34.3% of sales. This deleverage was due to slower sales, our long-term approach to payroll management Ted discussed and the timing of our advertising spend. Through the first 6 months of the year, our SG&A improved 9 basis points as a percent of sales versus the prior year, with the average SG&A dollars per store increasing 2.9% over the same timeframe. in the second half of the year, we expect that growth in SG&A dollars per store to slow, as we make minor adjustments to our store staffing in light of the anticipated slower sales environment and incur less advertising expense due to seasonality. For the full year, we expect SG&A per store to increase approximately 2%. Operating margin for the quarter was 15.6% of sales, representing a 56-basis-point improvement over the prior year as improvements in gross margin more than offset the SG&A deleverage. For the first 6 months of the year, operating margin improved 125 basis points to 15.9% of sales. For the year, we continue to expect operating margin to be in the range of 15.4% to 15.9% of sales. Diluted earnings per share for the second quarter of a $1.15 a share represents a 20% increase over prior year's diluted earnings per share of $0.96. For the first half of 2012, diluted earnings per share increased 29% to $2.29 a share as compared to the prior year adjusted earnings per share of $1.78. As a reminder, the adjusted earnings per share from quarter 1 of 2011 excludes the one-time charges from our financing transactions. Moving to the balance sheet, we continue to make great progress in improving the productivity of our net inventory investment. At the end of the quarter, our inventory turnover, net of payables, was 4.8x versus 2.8x at this time last year. Inventory per store is currently flat compared to June of 2011 at $556,000 per store. However, with the store level inventory enhancement project increasing by $20 million, we now think year-end inventory per store will be up approximately 2%. The driver of net inventory productivity continues to be our ability to work with our vendors to improve terms through our vendor financing program. At the end of the second quarter, AP to inventory stood at 79%, which was an incredible improvement over the prior year ratio, which was 55%. We continue to anticipate our year-end payables-to-inventory ratio will be approximately 80%, as gains for the remainder of the year from our vendor financing initiatives will be offset by seasonality and the payments for inventory ordered as part of the store-level inventory initiative. At the end of the quarter, our adjusted debt to adjusted EBITDAR was 1.66x, which remains well below our long-term covered leverage range of 2x to 2.25x. We will increase our leverage over time, however, we remain very committed to maintaining our investment-grade rating. On this topic, we're pleased to report that yesterday, Moody's affirmed our Baa3 rating and changed our outlook from stable to positives. For the first half of the year, free cash flow improved 31% to $540 million. This strong improvement was driven by our increased net income and the improvement in our net inventory investment. Based on our results to date, we're increasing our 2012 full year free cash flow projections to $725 million to $775 million. From the beginning of the year through the date of this earnings release, we've repurchased 9.4 million shares with an average price of $91.53. This brings our life-to-date repurchases to 25.3 million shares, with an average price of $72.67. Our first priority for the use of free cash flow is to continue to consolidate the industry through accretive acquisitions. To the extent these opportunities are not available, we intend to continue to prudently execute our share repurchase program, with the cash and the balance sheet, additional free cash flow generated and additional borrowings as we incrementally increase our leverage ratio to our stated goal. Our guidance for both the third quarter and the full year takes into account shares repurchased through yesterday but does not reflect the impact of any potential future share repurchases. For the third quarter, our diluted earnings per share guidance is $1.25 to $1.29 per share. For the full year, our diluted EPS guidance is $4.56 a share to $4.66 a share. At this time, I'd like to ask Melissa, the operator, to return to the line and we'll be happy to answer questions. Melissa?

[Operator Instructions] We have a question from the line of Michael Lasser with UBS.

Greg, so there seems to be a lot of debate on the industry right now. I wanted to get your view on what you think is driving the more -- the greater variability in demand trends? Is it really weather, a hangover from some of the warm conditions we saw in the winter? Or is this more reflective of just getting towards the end of what's been a pretty good cycle for the industry?

Well, I don't think it's the end of a pretty good cycle for the industry. I think that the dynamics that drive demand in our industry with miles driven, the age of vehicles, and all those things continue to bode well for the industry. It really remains unchanged to some degree. I think the factors that are affecting us right, early in last quarter, but of course, the pull-forward of some business into the first quarter due to the mild winter. And I would suspect that, that has some effect on business this summer just related to parts that didn't -- weren't caused to fail by the lack of winter weather. But as much as anything, we would speculate that it is simply consumers that are reluctant to spend money in an uncertain economic environment. We see that in a lot of different ways. And when we look at our category reports, we see things that can be deferred. It appears as though they're being deferred, and talking with the many shops that we do business with, you hear them tell stories of their reduction and the ability to sell jobs. Someone comes in for a -- says their air conditioning won't blow cold, hoping that it just needs freon. And when they find out it needs a compressor and it's going to be an $800 job or something, they say, "Well, you know what? I'll take care of it later." And they drive with their windows down. Again, we see that in our by-category reports. And while we don't go into a lot of detail in our by-category sales, it's easy to see that some of these categories that are more subject to deferral are being deferred. And another headwind our industry had to some degree is just some commodity pricing. When it comes to seasonal items like freon, 30-pound cylinders of freon are selling for substantially less than they were this time last year, and that creates a bit of a headwind for all of us.

And to the extent that some of the stuff is being caused by the lack of duress from the warm winter, how long do you think that persists? Is it that once the fall arrives, then anything that would have been done is no longer an issue?

I think so. I think what -- I hope what we'll see is that -- we've had an incredibly -- we're in the middle of an incredibly hot summer and drought in the central U.S. A lot of things that are hard on cars and we see the effect of that heat up in some of the categories that would be subject to immediate failure as a result. Some of the failure that is caused by heat is deferred in the winter. For instance, on batteries, sometimes a battery will fail under heat. But many times, the damage is done to a battery during heat but it's not really stressed until cold weather when the engine demands the most from a cranking perspective. So our hope is, and what our past experience has been, is that when we have a really, really hot winter like this, that we would benefit from that -- or a hot summer like this, we benefit from that in the winter. Another factor for us is, the substantial amount of our business, at least in the historical O'Reilly stores, are in rural areas that are subject to customers who are in the agricultural business, and this drought is just terrible for their business. And we see that in our, for instance, our filter sales where we do a lot of our business in farm and ag filters. Our filter business isn't doing as good simply because the farmers aren't doing as much because their crops aren't growing because there's no water. So it's -- there's no question that there's some weather issues. But that, coupled with just the economic uncertainty, would be the things that we would speculate are causing the sequential reduction in comp store sales.

And my final question, is there any evidence to suggest that greater competitive factors are beginning to weigh on the DIFM side of the business? Perhaps it's a case where a commercial customer has a certain propensity to go -- to switch to a new supplier and so that they're more likely to go with one of the dual-focused auto part retailers. And so that segment of the market just going to be trading share from here on out?

Well, I think that there's no question that the do-it-for-me side of the business is a very competitive business. It always has been, and the more players there are in that side of the business, the more competitive it can be. I have to look to our sales results. And while we've liked for our historical O'Reilly stores that performed better on the do-it-for-me side, the sequential reduction we saw is pretty similar to what we saw in the DIY side. So I -- it's hard for me to think that it's related to competition. In the CSK stores, where we continue to, we feel like, robustly gaining market share. On the do-it-for-me side, we continue to see really good sales results there. So it's a factor to some degree. We, of course, have been in this business a long time and are very sensitive to what our competitors do. And they're very defensive when it comes to losing business to a competitor. So we -- it's something we work on every day, but it's always a challenge.

Your next question comes from the line of Gary Balter with Credit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: It's Simeon for Gary. Can you talk -- and this is following on Michael's question a little bit. You talked about your sense of market share, I guess, the slowdown. Was that purely market driven? Or could it be some market share shift? And then breaking out of the 1 to 3 range, will that be a function of the market getting better or do you think it's something competitive also on your end?

Well, I -- speaking of market share, I sure don't think we've lost market share by any means. And the information that we get indicates that we continue to gain market share. I think our ability to grow comparable store sales more robust than we did in the second quarter depends to some degree on both. We feel very confident in our ability to incrementally take market share, and I think it's exemplified with what we've done with the CSK stores. We have that ability and execute that ability every day, and I think we'll continue to be able to do that. I mean in the historical O'Reilly stores, I think, we have a very solid market share that we continue to incrementally gain, maybe at a slower rate than we are at the CSK stores, but I don't think we're losing market share. I think the contributor to our comparable store sales comes from just industry dynamics, having a good demand for auto parts, which I think has slowed to some degree related to just the position the consumers are in and then, of course, our ability to take market share, which we work every day to come up with better ways to do that. And I think we're as good as any one in the industry at accomplishing that. Simeon Gutman - Crédit Suisse AG, Research Division: And then following on some color that you mentioned that I think there was an equal slowdown to both businesses but that both contributed positively. If you break it down a little further, and it sounds like CSK is still a positive driver, was there any disproportionate slowing on a relative basis? The contribution from CSK slowing more than the other pieces or retail and historic markets slowing? I'm just curious for a little bit more texture there.

Yes. In historic markets, both retail and our Professional business, it decreased, of course. They both decreased in equal proportions. On the CSK side, our -- they were very close again, our do-it-for-me business being significantly stronger from a comp store sales percentage standpoint than what our DIY business has. Gary Balter - Crédit Suisse AG, Research Division: Okay. And then Greg, is there any -- if you look to pricing, have you tried any different pricing initiatives to see if that could be one of the issues holding back sales right here?

Well, we -- on the DIY side, for instance, Gary, we've shopped our competitors intently as I'm sure they shop us. And we can feel extremely confident that our prices are set competitive on the retail side. On the Professional side, it's a little more difficult. You don't -- our competitors, if we -- are not willing to tell us what price they sell a certain customer, and so you have to do a little digging to do that. So yes, we do experiment with that, and we have complete flexibility in the way we price our Professional customers. Our experience has been that while price is very, very important on the do-it-for-me side, it's the second, third or fourth on the list of things that are more important, including availability, the amount of time it takes to get the product to them, the abilities of the person that they contact to get the part. The professionals, the technicians don't want to deal with someone that doesn't know what they're talking about and they want the phone call to be very brief and as little information given as can possibly be given to make the transaction. So it's important, but I don't think that's the primary factor. But to answer your question, yes, we do experiment and we feel good about where we're at from a pricing standpoint. Simeon Gutman - Crédit Suisse AG, Research Division: And just one last thing, just following up on Michael's question. I don't know, maybe it's the same question. You sound pretty comfortable that if we don't have a seat change, like we haven't done all the deferred maintenance and all of this -- and we have a step-down on the business. So a lot of this is related to just the weather that we had. And by the fall, we should get back tomorrow of a normal maybe 2% to 4%, maybe 3% to 5% type comp. Is that reading too much into your commentary? Is that what you're seeing?

Well, Gary, of course, it's my speculation. But that's the way I feel. I just don't see anything that drives our business that has changed enough, that it would cause a deceleration outside of these other factors that could be affecting, either demand or deferred maintenance.

Your next question comes from the line of Alan Rifkin with Barclays.

Greg, you mentioned that you saw a deceleration in cold-weather markets. I was wondering if you would be able to quantify the comp performance in the cold weather markets versus the corporate average.

Well, Al, we have a variety of different cold-weather markets and in all honesty, I'd rather stay away from defining in these -- because we drill it down in a lot of detail, and I would rather not tell our competitors what our comps are. And some of those are to these [ph] specific markets. I can tell you that generally in the cold-weather markets, we saw a more abrupt deceleration in comparable store sales than we have in the warmer-weather markets.

Okay. Second question, if I may. So in the 4 quarters following your acquisition of CSK, which pretty much coincided with the height of the recession, when you broke out the performance between the legacy stores and the CSK stores, your legacy stores are still comp-ing consistently north of 1%, 2% even in that difficult environment. I certainly don't want to put words in your mouth or anything, but most people would agree that even with the consumer taking half a step back today, we certainly are a better environment today than where we were in the back half of '08 and throughout the first half of '09. Is there any reason why we would see a greater impact on your performance at the legacy stores for the next 2, 3, 4 quarters than what we saw in '08, '09?

I don't think so. I think that the economic factors may be similar to your point. They may not be quite as tough as they were. I think to this point in the year, the weather has been an unusual factor. Long term, it really doesn't matter. The weather is the weather, and our business will be what it -- will be what it is based on miles driven, and they cause parts to fail. But yes, I would see no reason for a -- for our performance in the core O'Reilly stores to be much different than what it would have been, and we expect it to be better.

Okay. And the second question I guess, if I may, since you're unable to answer the first one. You've spoken about your belief that the CSK stores, over the longer term, could get to $1.8 million a store. I was wondering if maybe you can provide us an update on that number. Do you still think that's a good number or if it's even north of that? And then if we look at the stores that were converted earlier, the Midwest and Seattle and compare it to, let's say, Phoenix and some of the latter markets, any discernible difference between the trajectory of the CSK revenues, post the conversions in some of the latter converted markets versus earlier converted?

Well, what I would say is, we continue to be very effective in our ability to roll out our DIFM programs. And we're a little, I guess, beyond where we would expect on an average store basis, would have expected to have been when we set our early plans. As far as the trajectory of which those stores are comp-ing, what I would say is the -- some of the early conversion stores we have are in cold-weather markets up in the upper Midwest. And those stores' trajectory did slow greater than the rest of the CSK stores. The CSK stores in the West Coast continued on -- at a very solid trajectory, whereas the ones in the upper Midwest slowed some. It's really pretty well beyond what the rest of CSK stores, and we do relate that directly to some pull-forward than just the effects of the weather. And we've really not publicly given the exact number we average per stores in the segments of stores, so I'd rather not do that. But I can tell you we're well down the road with getting into our $1.8 million average.

And Alan, this is Tom. When we look at the progression of comps based on the date that the stores were converted, we continue to see it pretty similar ramp, and we are confident that we'll hit the stated goal of $1.8 million per store.

The next question comes from the line of Christopher Horvers. Christopher Horvers - JP Morgan Chase & Co, Research Division: I know you don't really want to talk about the weather, but I was just curious if perhaps Texas is an issue. We talked to clients down there. And it's not an issue but that's where maybe some of the slowdown is. You have maybe 12% of your stores there. And in spite of the drought in the Midwest and Southwest, it seems like it was a lot warmer there last year. And perhaps some of that A/C -- some of the air-conditioning slowdown attributable specifically to that market?

I wouldn't think so. There's a lot of factors that go into how we evaluate our comparable store sales. Sometimes we do well on markets because we have made changes in the market that resulted in good -- more positive results. I would tell you that we're pretty happy with Texas right now as being one of the southern markets that's less affected by the pull-forward from weather. And while the drought in Texas and some of the agricultural business in Texas, with the cattle farmers and so forth isn't as strong as it was, overall, we're doing really well in Texas. Texas is generally a good economic state, and we're pretty pleased with it. So I'd say that, just general auto parts sales growth in Texas, market share gains in Texas are more than offsetting the effect of the hot, dry weather in the ag business. Christopher Horvers - JP Morgan Chase & Co, Research Division: Understood. And then just to reflect back on last year, were your monthly comps pretty similar throughout the quarter last year in the third quarter?

They were pretty similar. They were very similar. July was just slightly softer than August and September, but they were very close.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

I'm going to focus on some of the sales commentary as well. You spoke about the weather and its impact on pull-forward for April. As you think about July and the fact you're running within the range, is it your view that the weather that you're experiencing today is a positive for that number as you're within that 1% to 3%?

Matt, I think it is released as it should be. The categories that hot weather affects: cooling systems, automotive batteries, HVAC. Automotive batteries, we're not going to cover off the ball. Cooling, we're doing real well. HVAC, because it's somewhat discretionary, someone can decide not to fix their air-conditioner, isn't performing as well. Whereas in this environment, we should be doing very well. So generally, I would say that it's a -- the weather is very favorable right now. I would say that there's a backdrop of economic uncertainty that is causing consumers to be reluctant to spend money to fix their cars, as they're probably reluctant to spend money on clothing or anything else that they're buying.

One thing I'd add to that, Matt, is look at the prior 2 third quarters, they have also been positive weather quarters for us as far as heat goes.

Okay. And related to that, I mean, if you think about the different components of your business, if you think about failure, if you think about maintenance, if you think about discretionary, whichever you realize is small for you, is the discretionary business such as you identified getting hit any harder than any of the needs-based businesses? Or is the slowdown across the mix pretty similar?

The -- what we'd say about that is, discretionary has been under pressure for the last 4 or 5 years, and it's not a huge portion of our business as we focus on the hard parts. So it's not having a dramatic impact on our comps.

Got it. And then finally, I did note, unless I misread it, that while you cut the high end of the comp range, it looks like you left the sales dollars intact. I'm not sure if that's a function of new store productivity or something like that, any clarity would be great there.

The -- well, we cut the guidance the same after our strong results in the first quarter. So when we look at year-to-date, that hasn't -- for the full year, that hasn't changed. So we didn't change it in the positive direction the first quarter and left it the same here in the second quarter.

Your next question comes from the line of Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Greg, earlier, you had indicated that you did not believe O’Reilly is losing market share. I don't think it is either, but you did indicate that your sales in June were noticeably weaker in the first 3 weeks and yet is NAPA is indicating that their business was stronger in June. So how do we reconcile those differences?

I don't know. That's a good question, Dan. I don't know how to reconcile that. I can tell you that from a comparison standpoint for us, we were weaker in the first 3 weeks of June. Now I don't know NAPA did last year and what they're comparing to. Maybe they were down the first 3 weeks of June. It was easier for them to comp the first 3 weeks of June this year, if I were to speak. It will be something that'd be hard for me to answer not knowing the details of their comp composition. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Okay. And then, Tom, I have a question for you. And the decision as to why O’Reilly pre-announced -- I mean, after all, your earnings came right in the middle of the original guidance. And your same-store sales were 1/2 of 1 percentage point below the low end of your guidance, which is not a surprise, given what Advance and Monroe had to say after your last conference call. So are we establishing a new precedent going forward, that if we don't hear from O'Reilly, it's an indication you're going to have to be in line or better? And that if -- given what you had to say in the second quarter?

I -- and then Tom will have some comments he wants to make on this, too, Dan. But what I would say is, we try hard to be as transparent and straightforward with our -- with the analysts and investors, shareholders as we can be. We have said several times, that if we were going to miss our comp guidance, because we're always asked about comp intraquarter and we try not to talk intraquarter about what's going on in the quarter any more than we would if we were disclosing it to everyone, because we had said several times that if we were to miss it, we would pre-announce. We decided -- at the point we decided to pre-announce, there was the chance that we could have gotten down to the low 2s, which we would have considered a substantial miss. The end of June, comps increased. And we ended up getting 2.5. Had we known we'd ended up at 2.5, we might not have, but we felt like it was most appropriate that we do, based on the transparency and the comments that we have made to investors and shareholders about what would cause us to let them know if we were outside of our comp guidance. Tom?

For my time here at O’Reilly, and I'm pretty sure of our history, we've only pre-announced one other time, which was the first quarter of 2008. To tackle Greg's comments, the end of June is a very volatile time for our business based on the timing of holiday and the days that -- the month end is leading into the holiday. So there was a possibility that we would be 2 or below 2, and we're happy to see business pick up. But based on where we were and the comments we've made in the past about missing comps and letting people know it was a significant number, we decided to release. Directly to your question of, in the future, will you -- should you expect us to pre-release if we are below comps guidance? We'll make that decision. We're not going to commit anything at this time.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Hey, Scot Ciccarelli. I guess what I'm trying to figure out is, you've made a number of references to the economic situation, et cetera. And I get the fact that we're in a little bit of a rougher patch right now. But the truth is, this is an industry, and your company, frankly, performed incredibly well kind of through the depths of the recession. That being said, you did miss your own sales guidance, 3 out of 4 quarters, heading into the recession. So I guess I'm just asking for maybe a parallel on kind of what you saw back then, because you guys were all there in those seats, to what you're seeing today on the economic front.

Well, what I'll tell you is still a lot of water passing the bridge, Scot. And I -- what I would say is that there -- I remember the time you're talking about and the demand had slowed some. There are reasons sometimes for demand to be slow. It's hard to quantify. We typically lean on consumers that are deferring maintenance based on our -- the work we do in the field with our shops and our territory sales managers to kind of understand what our repair shops are seeing, the customers that buy from us. And when you go through a period where 6 out of 10 jobs, a shop is not able to sell after giving the estimate, and it's deferred for a month until someone gets a paycheck or whatever the case may be. You get the feeling that the economy is affecting our business on the DIY side, too. And today, we're hearing a lot of that. And then when I read what I read about other retailers and the struggles that they're having with revenue, it just makes you realize that there's a lot of uncertainty among consumers right now, and people are holding on to money. And when they have an opportunity to defer a spend, we have to feel like they're doing so. Fortunately for us, many of the automotive things that they were spending money and not things that they can defer if they want to drive their cars. Although this time of year, there are probably more things that they can defer because our business becomes a little more dependent on a deferred repair item, which is HVAC, which is not performing as well as what we would ideally like to see right now.

So I guess I'm just trying to understand and -- look, I understand everything kind of slow, but your indication, I guess, if I were to kind of read it, if I'm reading it properly is, you think the slowdown you've experienced is more on the economic front rather than a delay in hangover, if you will, from kind of the weather pull-forward?

No, I think they're both a factor. I -- it's hard to quantify either one, but -- us having gone through this really odd weather here, where we have this winter that in many markets, just didn't happen. Here in Springfield, Missouri where we normally would have some snows and ice and freezing temperatures for some period of time, we had none of that this past year. Many of our markets had those same conditions. It's hard for us to predict the effect that, that will have on demand in the summer. And now here we are in the summer, we're having incredibly hot temperatures. I would think that, that hot, while it is driving some of the things that we would expect it to drive, rotating electrical batteries, things like that, our feeling is that it will continue to drive demand in the wintertime when some of the parts that are damaged in the heat actually fail.

And your final question comes from the line of Michael Baker with Deutsche Bank.

So 2 questions. One, just a simple math, I think, if I go to the midpoint of your third quarter guidance for comps and then the midpoint of the full year guidance, it implies a couple of hundred basis points pickup in the fourth quarter. Is there any reason be -- that we should think the fourth quarter would get better? I do realize there are easier comparisons on both the 2-year and 3-year stack basis but wondering if I'm missing anything else there.

That's what we would point to also. As I mentioned earlier, the third quarter has been extremely strong in the last 2 years.

Okay, fair enough. Last question then, can you update us on both in terms of the acquired stores and total company? What percent of your business now comes from the commercial side? As I recall, the CSK had -- when you bought it, it was about 10%. You have a goal to get commercials above 40%. I think you had said it was somewhat in the low 30s last quarter. Can you update us on that, please?

Yes, right now it's 41.59%.

For the total company and then -- so that make the CSK stores still in the low-30 range somewhere?

Yes.

And the goal is to get back to 40% over time?

It would be. Like I said before, some of the stores are not in great do-it-for-me market. So we won't get to the -- closer to the 50-50 that we have with the historical O'Reilly stores but yes, which we will still be able to do that, we believe.

Okay. Well, I -- we've reached the end of the call. Operator, you didn't come back on, so I would make a closing statement here at the end of the call. I just want to thank everyone for their time this morning. You can be assured that Team O'Reilly will be working hard during the third quarter to make sure we generate good results, and we look forward to reporting these results to you in October. Thank you.

This concludes today's conference call, and you may now disconnect.