O'Reilly Automotive, Inc. (ORLY) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the O'Reilly Automotive Incorporated Third Quarter Earnings Release Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Tom McFall. Tom, you may begin.

Thank you, Ellen. 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 the earnings release and on 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 revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and 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 regulations, the company's increased debt levels, credit ratings on the public debt, the company's ability to hire and retain qualified employees, risks associated with the performance of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors section of the Annual Report on Form 10-K for the year ended December 31, 2012, for additional factors that could materially affect the company's financial performance. These forward-looking statements speak only as of the date they were made, and the company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts Third Quarter Conference Call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Jeff Shaw, our Executive Vice President of Store Operations and Sales. David O'Reilly, our Executive Chairman, and Ted Wise, our Executive Vice President of Expansion, are also present. It is once again my great pleasure to congratulate Team O'Reilly on another profitable record-breaking quarter. And I want to thank each and every one of our dedicated team members for their unwavering commitment to providing the highest level of customer service in our industry. At the beginning of the quarter, we set the bar high with comparable store sales expectations of 4% to 6%, which was on top of the 3-year stacked comp comparison of 17.2%. Through your efforts and hard work, we generated an industry-leading 4.6% increase in comparable store sales for the quarter. We should all be very proud of our ability to consistently outpace the industry in comparable store sales growth, especially in the midst of ongoing difficult macroeconomic conditions. In total, we grew sales for the quarter by 8%. And because of our team's relentless focus on profitable growth and expense management, we generated a record quarterly operating margin of 17.4%, driving a 28% increase in earnings per share to $1.69. This represents our 19th consecutive quarter of adjusted earnings per share growth of 15% or greater. Our team remains committed to providing consistent, excellent customer service in each of our stores every day as we continue to focus on executing our proven business model of serving both retail and professional service provider customers. I could not be more proud of the great job our team does serving our customers, and I would like to again thank all the Team O'Reilly for driving our record-breaking results this past quarter. I would now like to take a few minutes to provide some color around our sales performance for the quarter. Business was fairly consistent throughout the quarter, adjusted for the Sunday benefit we had in July. And we are on track to finish the quarter at the midpoint of our 4% to 6% guidance range until the end of the quarter. September finished slightly softer than we had anticipated, primarily driven by the anniversary of aggressive prior year advertising and promotional activity, and resulted in a 4.6% increase in comparable store sales for the quarter, just slightly below the midpoint of our expected range. While the cadence of our prior year promotional activity was a small headwind to our comp growth for the quarter, it was one of the factors that supported our 59 basis point improvement in gross margin for the period. The core O'Reilly and acquired markets contributed equally to our comp store sales growth for the quarter. The strength of the core O'Reilly comp this quarter as compared to the acquired markets is primarily the result of the much more difficult prior year comparisons in the acquired markets. However, going forward, we expect that the acquired markets will provide a larger portion of our comparable store sales growth as we continue to capitalize on the tremendous opportunities to gain share in these markets. Both the DIY and professional business contributed to our growth for the quarter, although more from the professional side as we continue to see that side of our business growing more robustly chain-wide. The rapid growth of the professional business in the acquired markets continued during the quarter. However, our core O'Reilly stores also posted very strong growth on the professional side of the business. That said, we continue to remain confident in our ability to gain share on the DIY side of our business over time, driven by the initiatives we have in place and the opportunities created by changes in the overall industry. We will continue to focus on executing our proven dual market strategy in all of our stores across the country, and we are well positioned to continue to gain market share on both sides of our business. Average ticket continued to be a stronger contributor to our comparable store sales increase, driven by the complexity of vehicle repairs, pricing management and our overall business mix. However, ticket count was also a contributor during the quarter. As we have seen over the last several years, the quality of vehicles on the road continues to improve, and these vehicles have become more and more complex. These higher-quality, better engineered vehicles require less frequent repairs. However, when repairs are needed, they continue to become more costly, contributing to the growth in our average ticket size. Again, as we have seen all year, inflation was not a significant driver of our average ticket growth for the quarter. We also continue to see a shift in the mix of our total business into more costly hard parts categories, primarily driven by the growth of the professional service provider business contributing to the growth in our average ticket size. Ticket count comps continue to be strongly driven by increases in our professional sales, led by our acquired markets, and more than offset the pressure we experienced in DIY transaction counts. As we look at our sales performance on a category-by-category basis, the lack of extreme heat during the summer had a definite negative impact on hot weather categories like temperature control and refrigerants. However, we continue to see strong demand in many of our key hard part repair and maintenance categories such as brakes, drivelines, suspension and ride control. On a regional basis, we saw fairly consistent results across the country. We remain confident in the drivers we see for demand and continued growth in our industry. However, we believe the American consumer continues to be pressured from the persistently difficult macroeconomic conditions we have seen over the last several years. The key drivers for long-term demand in our industry remain unchanged. The total fleet of vehicles on the road continues to grow, aided by a recovering rate of new vehicle sales and flat vehicle scrappage rates. As a result of better engineering and manufacturing, vehicles remain on the road and in service for longer periods of time and undergo more routine maintenance and repair cycles, resulting in a historically high average vehicle age of over 11 years and continuing to expand the upper end of the vehicle age range of our core customer or sweet spot. While we remain confident in the long-term fundamentals of the industry, we remain cautious in the short term concerning the economic headwinds our customers face. Through August of this year, total miles driven in the U.S. were relatively flat, hampered by unemployment of over 7%. While this does reflect an improving trend, this rate is still persistently high by historical standards. We also believe that the average consumer remains very cautious and continues to worry about economic uncertainties such as the impact of health care reform and the impact the governmental shutdown had on the economic recovery in the U.S. We expect the solid business trends we experienced in the last 4 quarters to continue. But in light of the macroeconomic pressures and more difficult comparisons we face as we annualize the improved business trends that started in the fourth quarter of last year, we are setting our fourth quarter comparable store sales guidance at a range of 3% to 5%. Thus far in October, business has been solid, and we are trending within that range. As we look back at the fourth quarter of 2012, October and November were strong months with the year finishing a little softer in December. For the full year, we are tightening up our comp guidance range from 3% to 5% to 3.5% to 4.5% based on having 3 quarters of actual results in our books. The midpoint of our tightened full year range is at 4%, unchanged from the midpoint we established at the beginning of this year. Moving on from the top line, sequentially gross margin was relatively flat with the second quarter. These results are better than we had anticipated when we hosted our second quarter conference call in July as gains on product mix and the cadence of our promotional activities in the current year compared to last year offset headwinds in the current period resulting from our LIFO inventory accounting. Tom will discuss the impact of LIFO accounting on our gross margin results in more detail in a few minutes. But from a high level, as we renegotiate our key supplier agreements over the next few quarters, we will face some short pressure -- short-term pressure on gross margins. But these better negotiated product acquisition costs will benefit us as we turn the product going forward. On a year-over-year basis, gross margin improved 59 basis points. The improvement was driven by product mix, improved acquisition costs and year-over-year differences in the aggressiveness of promotional activity. These benefits were partially offset by the LIFO impact and the headwinds from capitalized distribution costs related to last year's store-level inventory build initiative. Looking ahead sequentially into the fourth quarter as we compare to the third quarter, we expect to see continued pressure from capitalized distribution costs related to last year's inventory build and increased pressure from LIFO accounting. On a year-over-year basis, we expect that improved acquisition costs will offset these headwinds, resulting in a fourth quarter gross margin percentage comparable to the fourth quarter of 2012. Based on these expectations and our year-to-date results, we are narrowing our full year gross margin guidance from a range of 50.3% to 50.7% to a range of 50.5% to 50.7% of sales. Our outlook for sales and gross margin results are predicated on market pricing remaining rationale and inflation falling below normal ranges. I would like to wrap up my comments today by quickly updating you on the status of our VIP acquisition, as well as the status of our loyalty card program rollout. All of the VIP store layouts have been reset and the new interior decor package is in place, and both interior and exterior signs have been changed to the O'Reilly logo. We have the majority of the back room, hard parts inventories and approximately half of the front room inventories changed over to the O'Reilly product lines. The final physical changes to the exteriors of the buildings will occur next year, and the timing will be based primarily on weather conditions. The business in these northeastern markets is very cyclical in nature with the extreme winter months representing the lowest top line volume months of the year. Our goal is to have the store inventories completely changed over and our programs in place to capitalize on the strong spring selling season in these markets, and we are on track to meet that goal. We also have some exciting news regarding our plans for growth in the Northeast that Jeff will discuss in a moment. As we said in the past, the acquisition of VIP will not have a significant impact on our results in 2013. However, it provides a springboard for our growth in the Northeast, and we remain excited about the opportunities to grow our brand in these new markets. I'm also very pleased to announce the successful rollout of our loyalty card program in all of our stores at the beginning of October with over 1 million members already signed up. Our program will allow us to increase our retail customer engagement and direct market special offers to our retail customers as part of our continuing efforts to grow our retail market share and build brand recognition. We're excited about the initial results of the program and are very optimistic about the opportunities this program will provide as we continue to improve the overall shopping experience for our retail customers. I want to finish up today by reiterating our strong belief in the long-term drivers of demand in our industry. We remain steadfast in our long-term commitment to executing our proven strategy of serving both retail and professional service provider customers by providing unsurpassed, consistently high levels of customer service in all of our stores every day. We are confident in our ability to continue to gain market share while also delivering profitable results. I would like to again thank all members of Team O'Reilly for your hard work and the commitment you've made to our continued success. Congratulations on another record-breaking quarter. I'll now turn the call over to Jeff Shaw.

Thanks, Greg, and good morning, everyone. I'd like to echo Greg's remarks and thank Team O'Reilly for their hard work in delivering strong results against high expectations. Your dedication to providing consistent, top-notch customer service drove our industry-leading comparable store sales growth and record operating margin. Again, thank you for your continued efforts to make O'Reilly the market leader in customer service. I'd like to begin today by talking about some exciting distribution center expansion. As Greg alluded to earlier, we now have our plan in place to add significant distribution capacity in the Northeast by relocating our acquired DC in Lewiston, Maine, to a facility in Devens, Massachusetts. We purchased an existing facility in Devens, which is in the western suburb of Boston, and plan to relocate our Lewiston, Maine, facility, then begin service out of this new location in the back half of 2014. The new DC will be approximately 370,000 square feet, will have the capacity to service 280 stores and will be key to our continued growth in the Northeast markets. We knew, when we acquired the VIP stores, that we'd need a larger facility to support the growth in the existing store base as well as to robustly grow in the Northeast, and the new Devens facility will deliver that capacity while also leveraging some of its fixed costs from day 1 as it supports the 56 acquired VIP locations. Our real estate group has been actively identifying site zones throughout the Northeast this year and is currently in the process of negotiations for potential new store openings in these markets beginning in early 2015. Our focus for the acquired VIP stores over the next year will be: to complete the inventory changeovers, complete the refurbishing of the interior of the stores and roll out our commercial programs. In addition, we continue to train the store teams on our processes and procedures. But most importantly, we're instilling the O'Reilly culture of providing consistent, top-notch customer service to every customer who calls or walks in our store. We remain very excited about our opportunity to expand in the Northeast, and the new facility in Devens will provide the springboard we need for this expansion. With the addition of the Devens DC, we have 3 active DC projects in the pipeline. As we discussed on last quarter's call, we have a new DC scheduled to open in early 2014 in Lakeland, Florida, to support our rapid growth in the Central and Southern Florida. This is a 390,000-square foot facility capable of serving 300 stores. We're also working on a new 360,000-square foot DC in Naperville, Illinois, that's scheduled to open in second half of 2014. This DC will be capable of serving up to 250 stores and will support the vast Chicago land market as well as free up capacity in several of our Midwestern DCs. Three concurrent new DC projects is a big task. However, our DC operations teams are seasoned veterans and have the proven ability to manage multiple projects simultaneously. If you recall, as part of our CSK acquisition and integration between July 2008 and November 2010, we successfully opened 4 new greenfield DCs, relocated 1 DC and converted 2 existing DCs. In addition, we opened a new greenfield DC on the East Coast in North Carolina in 2009 as well as relocated our Kansas City DC to a larger facility in 2009. Being able to efficiently and successfully build and open just 1 DC can represent a challenging undertaking. But our ability to manage multiple projects and successfully bring several full-service, "5 night a week" delivery DCs online in a short period of time without service interruptions has been a critical factor in the outstanding service we provide to customers in existing and new markets. The success of these projects is the direct result of the meticulous planning and the flawless execution by our DC operations teams led by Greg Johnson, our Senior VP of Distribution Operations, and Larry Ellis, our Vice President of Distribution Operations, who, combined, have over 68 years of experience in our industry. Greg and Larry lead an experienced and talented team, and we're highly confident we'll be able to replicate our past successes with the current DC projects. Our robust regional tier distribution network offers multiple same-day deliveries to over 85% of our store base and "5 night a week" replenishment to every store in the Continental U.S. For 56 years, we've understood the importance of providing a consistently high level of parts availability to customers is the key to long-term success, and we're confident in our ability to continue our tradition of top-notch service in every new market we enter. I'd like to shift gears a little and talk about our new store growth. We opened 48 net new stores in the third quarter, and we're on track to hit our goal of 109 net new stores in 2013. Our store openings were again led by the Florida, Ohio and Texas markets. We continue to be pleased with the performance of our new stores, and, based on that success, we plan to increase our new store openings to 200 in 2014. We expect to open stores in approximately 34 states next year as we continue to identify great opportunities across all of the markets we serve and have the capacity throughout our distribution network. Our growth next year will consist of openings in existing, new and acquired markets. Existing markets, such as Texas, continue to offer robust economies and growing populations, and we have very seasoned store and DC teams in these existing markets to support this growth. Greenfield markets, such as Florida, will also see significant growth in 2014 and will be supported by our new DC in Central Florida. In addition, we plan to enter our 43rd state next year with openings in Pennsylvania. Finally, with our dual market strategy firmly in place, we'll grow in our Western acquired markets next year. California alone has significant backfill opportunities, and we also plan to open new stores in Oregon, Utah, Arizona and Washington in 2014. Now I'd like to take a minute to talk about some of our operating numbers. We leveraged SG&A 36 basis points during the third quarter, driven by solid comparable store sales of 4.6% and our relentless focus on expense control. Year-to-date, we leveraged SG&A 8 basis points, which is slightly above our expectations of being flat at this point in the year. Our SG&A dollar spend was in line with our expectations. Year-to-date, average SG&A per store has increased approximately 75 basis points, and we expect that rate to continue in the fourth quarter. I'd like to finish up today by recapping the highlights from our recent store operations leadership meeting. Each year, in the late summer, we bring our regional managers together in one room to discuss business strategy and ways to continue to perpetuate our model as well as replicating the O'Reilly culture in all of our new markets. The theme every year is very simple: how do we continue to deliver that consistent, top-notch customer service in every store every day? We focus on the fundamental concepts of execution in every store, identifying and developing strong leaders and internally building our bench of future store and district managers to support our growth as well as creating strong and cohesive store teams. These are the very same concepts that have made us successful for the past 56 years and are the keys to our future success. Our regional managers left the meeting fired up, ready to replicate the knowledge and the training they received with each of their district managers who, in turn, replicate the training with each of their 4,135 store managers across all of our markets. We remain well positioned to continue our track record of profitable growth supported by 61,000 team members dedicated to delivering unsurpassed levels of service to each one of our customers every day. I would, once again, like to thank our store and DC operations teams for their hard work and dedication and want to congratulate them on another very successful and profitable quarter. Now I'll turn the call over to Tom.

Thanks, Jeff. Now we'll take a closer look at our results and add some color to our guidance. Comparable store sales for the quarter increased 4.6% on top of prior year's comps of 1.3%. Third quarter comps came in within our range despite the lack of extreme temperatures, which created a headwind for our results in weather-related categories, as Greg previous discussed. For the quarter, sales increased $126 million, comprised of a $72 million increase in comp store sales, a $52 million increase in non-comp store sales, a $3 million increase in non-comp, non-stores sales and $1 million decrease from closed stores. As Greg mentioned, we're setting our fourth quarter comparable store sales guidance at 3% to 5%, which is in line with our internal expectations created at the beginning of the year. We're adjusting our comparable store sales guidance for the full year 2013 to a 3.5% to 4.5% increase in comparable store sales, which is simply narrowing our previous guidance as comp sales for the first 3 quarters have been within our expectations. Our full year total sales guidance remains unchanged at $6.6 billion to $6.7 billion. As Greg discussed, our gross margin results exceeded our expectations for the third quarter despite headwinds resulting from LIFO inventory accounting. I'd like to provide a little more color on what we've seen on this front and what we're expecting over the next few quarters. As a result of our incrementally better purchasing power over time, our product acquisition costs have outpaced inflation and resulted in a reduction of our LIFO reserve to a calculated LIFO debit. We have elected the conservative approach and have not and will not record the LIFO debit, which will have the effect of writing off our inventory value beyond replacement cost. To the extent we have received and expect to continue to receive acquisition cost improvements while in a 0 LIFO reserve balance, we have temporary onetime hit to gross margin to adjust our existing on-hand inventory to the new lower acquisition costs. I want to strongly emphasize that these are non-cash, short-term headwinds, which will be quickly offset by the long-term gains as acquisition cost improvements generate increased point-of-sale margins ongoing. As a result, we expect these LIFO charges to be a meaningful headwind in the fourth quarter of this year and the first quarter of 2014. After that period, we expect the quarterly impacts from acquisition cost reductions will be largely mitigated by the improved gross margins generated by the deals we are currently putting in place. As Greg previously mentioned, we expect the impacts of the LIFO accounting and capitalized distribution costs to create pressure on our sequential margin in the fourth quarter. But on a year-over-year basis, we're expecting fourth quarter gross margins to be comparable to last year as a result of the acquisition cost improvements. As a result, we're tightening our full year gross margin guidance to 50.5% to 50.7%. Although we will not give full year 2014 guidance until our next conference call, we do expect the pressure from the expected LIFO charge in the first quarter of 2014 to result in approximately flat year-over-year gross margins in the first quarter of next year. Operating profit as a percent of sales for the quarter was 17.4%, which was a 94 basis point improvement over the prior year and represents an all-time high quarterly operating margin. For the first 9 months of 2013, operating profit as a percent of sales improved 79 basis points to 16.9% of sales. Based on our strong year-to-date results, we're raising our full year operating profit as a percent of sales guidance to 16.2% to 16.5%, up from our previous guidance of 16% to 16.4%. Diluted earnings per share for the third quarter was $1.69 per share, which represents an increase of 28% over $1.32 per share in the third quarter of 2012. For the first 9 months, diluted earnings per share was $4.63 per share, which represents an increase of 29%. Our third quarter and year-to-date EPS benefited from tax rates of 35.3% and 36.5% of pretax income, respectively, versus rates of 37.3% and 37.9% for the third quarter and first 9 months of 2012, respectively. The third quarter of 2013 benefited from job credits in excess of expectations versus the third quarter of the prior year, which was negatively impacted by adjustments for certain tax audits. Based on our year-to-date results, we now expect a full year tax rate of approximately 36.8% of pretax income for 2013. For the fourth quarter, we're establishing diluted earnings per share guidance of $1.27 to $1.31. Based on our above-plan results in the third quarter and additional shares repurchased since our last call, for the full year we're raising our guidance from $5.79 to $5.89 per share to $5.91 to $5.95 per share. As a reminder, our diluted earnings per share guidance for both the fourth quarter and full year take into account the shares repurchased through yesterday but do not reflect the impact of any potential future share repurchases. Moving to the balance sheet. Our average inventory per store at the end of the third quarter was $572,000, up 1% from $567,000 at the end of the third quarter of 2012 and in line with our per-store inventory at the end of 2012. We continue to project inventory per store to be flat in 2013 as we continue to identify opportunities to redeploy our existing investment into more productive inventory. Capital expenditures for the first 9 months of 2013 were $300 million. The purchase of the Devens, Massachusetts, distribution center brings us in line with our year-to-date expectations after being slightly below our plan in the first half of the year. With continued development of now 3 distribution center projects in the fourth quarter, including the Lakeland, Florida, and Naperville, Illinois, facilities in addition to Devens, we expect to be in the upper end of our previous CapEx guidance range, so we're tightening that guidance range to the $395 million to $415 million. At the end of the third quarter, our AP-to-inventory ratio was 87.8%, up from 84.4% at the end of the third quarter of 2012 and 84.7% at the end of 2012. The year-to-date increase was better-than-expected primarily due to incremental gains in terms we've realized with your suppliers. While we do expect our ratio to come down somewhat in the fourth quarter due to the seasonal timing of payments, we now expect to end the year slightly above our earlier expectations of flat with the end of 2012. For the quarter, free cash flow declined to $158 million versus $276 million in 2012. This decline was caused solely by the dramatic improvements we made in our net inventory investment throughout 2012 driven by the rapid growth in our vendor financing program. On a full year basis, we're expecting the improved outlook on our AP-to-inventory ratio, partially offset by a CapEx spend closer to the top end of our range and slightly higher deferred tax payments related to previous tax depreciation accelerations, to drive free cash flow to the high side of our previous guidance. As a result, we're narrowing our guidance range to $470 million to $500 million. Next, I'll provide an update on our share repurchase program. As we've discussed several times since the inception of our repurchase program, we continue to believe the best use of our cash is to reinvest back into our business. But we continue to view buybacks as an effective use of excess available cash and will continue to opportunistically execute the program moving forward. During the third quarter, we repurchased 1.5 million shares for an aggregate cost of $185 million at an average price of $120.71 per share. Subsequent to the end of the third quarter and through the date of this earnings release, we repurchased approximately 0.2 million shares at an average price of $125.74, bringing our cumulative year-to-date share repurchases to 6.8 million shares at an average price of $105.69. Our cumulative share repurchases since the inception of our program in January 2011 through yesterday were 38.9 million shares with an average price of $80.77. As an update, we currently have $316 million remaining under our current board-approved share repurchase authorization. At the end of the third quarter, our adjusted debt-to-adjusted EBITDAR was 1.94x. As we discussed on the second quarter earnings call, we still intend to move prudently toward our long-term targeted leverage range of 2 to 2.25x and would have expected at the beginning of the year to have entered that range, but our strong 2013 EBITDAR results still have us slightly below our target. We remain confident that our established target leverage range represents the appropriate capital structure for our company, and we will continue to incrementally move toward entering that range. However, as I've discussed in the past but it bears repeating now, we're extremely committed to adhering to our target leverage cap so that we can maintain or improve our investment-grade ratings as this is a critical factor in maintaining the success of our vendor financing program. Before we turn the call over to the operator to take your questions, I'd like to take this opportunity to thank all of our store, DC and headquarter team members for their hard work and commitment to our company's success. Your commitment to providing the best customer service in the industry is the driving force behind our continued outstanding financial performance, and I want to express our gratitude for the dedication you show every day. At this time, I'd like to ask Ellen, the operator, to return the line, and we'll be happy to answer your questions. Ellen?

[Operator Instructions] Our first question comes from Scot Ciccarelli with RBC Capital Markets.

Two questions. The first is, what kind of impact are you expecting from the LIFO in the fourth quarter and first quarter? Said another way, what will gross margins look like, excluding the LIFO impact? And then, since I'm sure somebody else will ask it if I don't, can you guys just talk about what you're thinking regarding Advance's recent acquisition announcement the other day in terms of any additional challenges or opportunities that, that may provide?

Okay. Well, I'll take the second question and I'll defer the LIFO question to Tom. I'll let -- I'll answer first. On Advance's acquisition of GPI, we basically have, read all the information you have, of course. And us being in the business, we know probably a little bit more about those companies from a competitive standpoint than you do. So we, of course, looking at it from our side, see the opportunities that could be created, just as our competitors see opportunities when we acquire companies, to take advantage of the distraction and the work that has to be done to integrate those companies. So we'll, of course, be working to do what any good competitor would do, and that is to try and gain market share as they work to bring those companies together. There's still a lot of unknown as far as what they'll do with the brands and whether the Park West and Advanced stores will be integrating together or they'll continue operate those in the same market separately. So there's a lot yet to be seen. But we, of course, see the opportunities that we have to take advantage of potential market share gains as they work through that acquisition.

Scot, on the second part of your question, we would expect, absent the LIFO charge, to see a relatively consistent gross margin percentage with the third quarter in the fourth quarter.

The next question comes from Mike Baker with Deutsche Bank.

So I wanted to just ask 2 questions. One, on the -- out West with CSK. Can you tell us what -- where are you in terms of the DIY-DIFM mix in those stores? And then I guess then, where are you company-wide? Just sort of frame how far you are into that process. It's been what, 4 or 5 years and you still say you have room to go. So just sort of contextualize that. And then same type of question on the benefits of renegotiating with your vendors. How far along are you in that process? How much more benefit do you have to go there?

Okay. Well, on the CSK product mix, our company as a whole, we're about 42% professional and 58% DIY. CSK is more DIY-oriented still. They would still -- they would be more in 66%-34% range, something like that. So we continue to work to gain that market share on the professional side out there, and that becomes a bigger part of our mix. As we've talked about, we continue to do a little better DIY out there, so we're growing both sides of the business. But the commercial business grows significantly faster than the rest of the business. And then, Tom, you take the remainder.

Sure. On the timing of deals, we expect to have some pretty big deals get re-upped here in the fourth quarter and the first quarter, which is why we're calling off the LIFO charge. After that, we'd expect to be on a pace to be back to more incremental gains.

Okay. If I can just follow up on that CSK. So 66%-34% in terms of DIFM. What can that DIFM get to? Is it ever -- I don't think it ever gets to the 50%-50%, right, but if you can just talk a little where you think it could get to.

Yes, I don't think it'll get to 50%-50% just because some of the locations that we're in out there are more retail-inclined locations. But it can probably get to -- I don't know, I would be guessing because we're trying to grow both of them as much as we can. But we might get it to the 45%-55% range someday. But again, that's yet to be seen. It depends a lot on just the what happens in our industry relative to the amount of DIY business and hold the amount of the do-it-for-me business. I think everyone agrees that right now, the do-it-for-me business is growing a little bit more robustly than the DIY business. So it may be that we reach a point that we're not able to get our DIY business to be that much of our mix out there or maintain that much of a mix out there. But we'll see. We -- our do-it-for-me business is strong and growing, and we'll just have to see where it ends up.

The next question comes from Gregory Melich with ISI Group.

I just wanted to get a little more color on that DIY versus do-it-for-me relative performance. You said that both were positive. Was that outperformance that do-it-for-me seems to have regularly, did that widen in the quarter? Or is it pretty much what it's been running? And then I had a follow-up on the purchasing.

You're referring to the company as a whole?

Yes.

Yes. No, it stayed pretty -- well, no, it narrowed a little bit. The -- no, I'm sorry, it widened a little bit with -- compared to last quarter. The -- it's a little bit wider this quarter. We had one less Sunday, which is a good number for the professional side and less good for the DIY side. So yes...

So excluding that sort of dayshift, do you think the gap has stayed whatever, sort of, yes, really 600 bps?

Well, we're not going to comment on the 600 bps.

Okay. But that would be my answer. So the -- on purchasing, Tom, could you just give us a little more color on why now on the extra traction on the purchasing? Are there particular categories that you're resetting? And how is inflation looking on the flip side in terms of sell-through, if there is any.

Yes. Tom may have some comments on this, but we're simply going back through our major vendors, primarily hard parts vendors and -- post the CSK acquisition and the expiration of some of the agreements that we had post the acquisition and just kind of reworking those deals and resetting those deals to reflect our planned growth on the East Coast and the rest of the country, and that's kind of what we're working through. So these are deals that will benefit us and our manufacturers as we assure them business and growth into the future. And that put us in a position to work to do on the East Coast what we've not yet done and have been able to do in the Central and the Western part of the country.

On the inflation side, when we look at sale prices year-over-year, excluding mix, we're well below historical averages for inflation, which I think had been noted at other places within the industry.

Still positive but well below history?

Nearly positive.

The next question comes from Matthew Fassler with Goldman Sachs.

I'd like to focus my question on traffic and ticket, where you did give us some color, but to think about the traffic and ticket trends within each of DIY and commercial for you, please.

Okay.

Yes. When we look at traffic on DIY, it's been pressured over a long period of time due to the changes in vehicles and the frequency of repair. Last quarter, we had one of our best DIY traffic counts in a while, and that slowed this quarter. So there continues to be pressure. So again, we had one less Sunday, which is good for the professional side of the business and more challenging to the DIY side of the business, but it did slow. Now on the do-it-for-me side of the business, we continue to gain share, both in our existing markets and even more robustly in the acquired markets. So those ticket counts are -- increases are more than offsetting the DIY pressure.

And is there -- if you look at the tickets on the DIY side, I guess, you sort of talked about an industry-wide trend of fewer repairs but of larger magnitude. Is that playing out on the DIY side of the business as well?

We see that on both sides of the business, yes.

Great. and then just quickly by way of follow-up, I know you said inflation was not really a factor. I'm asking that as it relates to comp rather than gross margin and the whole LIFO theme. As you look forward to 2014, as you look at raw material costs and other factors, any anticipation of the impact that you would expect from inflation?

For the foreseeable future, we don't see a catalyst out there that's going to drive our acquisition costs higher and sale prices higher. So we're not expecting to see for the foreseeable future comps driven as much by inflation as we've seen in the past.

Your next question comes from Simeon Gutman with Credit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: So just looking at Q3 relative to Q2, and Tom, you said that DIY was a little slow or slower, can you talk about whether that's just industry, macro or weather or was it market share that you could identify?

I think we've been saying that it would just be more macro. And maybe not so much industry related, but I would relate it more to the fact that the DIY customers are typically customers that are -- and many have worked on their own cars because they are economically incentivized to do that. They really can't afford to have their car worked on, so they try to do some of the jobs themselves. And I think some of the things that have happened of late with the governmental shutdown and those kinds of things, us maybe not having as quite as hot a weather as what we would have typically had in the summertime, those things probably put a little bit of pressure on the DIY. I think that from an industry standpoint, that everyone agrees that the do-it-for-me business is growing a little bit faster than the DIY but -- business just as a result of the complexity of vehicles and the expertise that it takes to do some of the drivability-type repairs, and we would expect that trend to continue into the future. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And then a follow-up. I think I got the relationship right that the gross margin benefited from being a little less promotional this year. Can you talk just about the trade-off there? And is this an intention? Is this a posture you plan on going forward? And do you think had you been a little more promotional on a tougher day, you could have gotten better comps? I'm just thinking about the return there.

Yes. It really is a timing thing. We plan our promotions based on a variety of things, including the timing with vendors related to their preference on oil change specials and some of those kinds of things. The primary difference here is just some pretty aggressive oil change specials we had running during that period last year that we didn't have running at the same time this year. Really, nothing has changed. But it did have an impact, and it was a positive from a gross margin perspective and probably did put some pressure on sales during the quarter. And definitely, as we look at it from a category-by-category basis, those categories that we were promoting last year didn't perform nearly as well from a sales standpoint towards the end of the period as they performed last year, but they, of course, performed much better from a gross margin perspective. So it's just typical promotions. Nothing has changed with the way we do it. Strictly a timing thing.

Our next question comes from Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: I want to follow up on that one as well. I mean, you mentioned -- it sounds like you really believe that the promotional changes, what drove some of the slower trends into the end of the quarter, I mean, is there anything that you've seen in -- around the government shutdown leading in, coming out that would suggest that there was an impact, probably temporary but there was an impact commercial versus DIY? Was there a difference in those businesses as well related to that?

Yes, here's what I would say, Chris, that our DIY business definitely slowed down towards the end of the quarter more -- pretty dramatically. And we related it directly to the difference in the promotional activity that we were running last year in those categories that we're promoting. At the same time, this whole government shutdown and the bickering that's been going on in Washington, was going on, I think has informed, as most people are these days, because of the news agencies and smartphones and all that kind of stuff. I think it creates uncertainty, especially when people are living paycheck to paycheck and we're talking about defaulting on our sovereign debt and all the things that are discussed on TV and news agencies. So a lot of people don't really understand. They just think it's bad and can't be good for them. And then also, the impending health care debate and whether or not people are going to have to spend the money next year to have health care in order to abide by the law and what that means, and what's going to happen with their employer-sponsored health care when many are delaying their open enrollment because they are trying to figure out how to do this and what's the right thing to do, and they want to be competitive with other companies when it comes to the health care. We had all of us rapping a burden, a little more expense. So there's just a lot of uncertainties, I think, that also contribute to DIY softness. So far this quarter, we have seen our DIY business doing better, and our overall business has been solid, as I said. So I think the government saying, hey, we're going to get along for a while here, I'm trying to work this out, I think that has helped calm some nerves and things are maybe a little more back to normal. Christopher Horvers - JP Morgan Chase & Co, Research Division: Perfect. And then 2 more quick follow-ups. As you think about sort of -- what sort of weather backdrop are you expecting in the fourth quarter? It's been pretty shaky over the past couple of years. Do you think that -- as you see the outlook, do you think it's going to be more favorable this year?

I'll [indiscernible].

All right, you go ahead.

When we come up with our guidance, we will look at pricing trends and we will look at our business trends. We always project weather to be normal. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay, fair enough. And then last question. Just as you build inventory for these new DCs, how -- assuming that you're buying cheaper, is that part of the reason why you'll have a gross margin tailwind as the year progresses next year?

The new DCs really won't have a significant impact on our gross margin. It will have a little bit of headwind when they first open as they're not as efficient, although we're spreading it out across a large base. So that's the distribution cost standpoint. When we look at gross margin tailwinds next year, although we haven't given guidance, when we get beyond signing up some of the last few big deals we have and the impacts from our LIFO, when those subside, we're going to see that pressure released, and we'd expect to see higher margins in the back half of the year. And it really doesn't relate back to DCs or DC openings. We really try to focus our deals with our suppliers on how much product we're going to move over a period of time. Christopher Horvers - JP Morgan Chase & Co, Research Division: I guess I was just -- I always thought with LIFO that if you were buying, you're basically going to be flat inventory year-to-year right now. But as you step up presumably buy -- inventory growth year-over-year, that ends up being -- when you're buying lower, that ends up being a benefit in the LIFO calculation.

It won't impact our LIFO calculation as much as our capitalized distribution costs for more inventory, that helps to offset the value, the cost. The cap is a recognition of the value of putting more salable inventory in place in those costs you burden. So it really doesn't run through LIFO.

The next question comes from Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Greg, just following up on inflation. You noted that it's going to run below normal range, I believe is what you said in your prepared comments. What was the normal range? As I recall, it was around 2%. Correct me if I'm wrong. And then curious as to why the inflation rate is less. It's my understanding it's not just what's happening with copper and steel prices, but parts are more technologically sophisticated than they used to be. Therefore, the engineering costs are higher, and that's contributed to that historic inflation rate. So why would that not have continued?

Yes. Well, I think at some point, it most likely will continue. Our historic rate's been more in the 1% to 2% range, 1.5%, something like that. We're expecting it to be pretty flat. A big part of that's driven by commodities as oil prices have increased. And we're still seeing as much of that of late. And other commodities, too, [indiscernible] and some things like that. I think over time, we do move back into more of an inflationary environment, that as we've continued to grow and some of the other companies have continued to grow, we all buy well, it's harder, I think, for manufacturers to pass price increases through to these larger companies that operate very efficiently from a supply chain perspective. And we just went through a period and would expect to continue to go through a period in the upcoming year where we wouldn't expect there to be as much inflation, unless something were to happen that drove commodity prices up. And then we want to see some. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: And as a follow-up question, back when you bought CSK, operating margins in the core business were running about 12%. As I recall, CSK's operating margins were around 5%. And now, we're looking at the combined organization somewhere between a 16% and 17% operating margin. So you could make a case there's been about 1,000 basis points of synergies coming out of CSK. When you look at where you exceeded the initial forecast from 5 years ago with the integration, was that mainly in product acquisition costs?

Yes, a big part of it was product acquisition costs for sure. We've -- and a lot of that's due to a lot of factors. One, just the size and the buying power we have. A lot of it's efficiencies that we have created in supply chain from a -- just a supply standpoint, buying through vendors here in the U.S. but buying more product from overseas manufacturers and things like that. But yes, it has exceeded what we thought would be -- I think the majority of the synergy has come through improved gross margin.

But Dan, what I would add to that is CSK's operating margin of 5% was -- they were working pretty hard to keep that number down. So a lot of it is operational execution. So they should not have been at 5%. Should they have been at the 12% that we were at, there are some differences in leases and things like that. But part of getting their 5% up to 12% is just executing the business better.

Your next question comes from Daniel Hofkin with William Blair & Company. Daniel Hofkin - William Blair & Company L.L.C., Research Division: Just, I guess, another question related to CSK. If you could -- you talk about sort of core versus converted stores. At this point, sales productivity, how those compare, and where you see -- I guess my math suggests they're pretty comparable at this point in terms of sales per store or sales per square foot. Where could you see -- if I'm right about that, where could the converted stores get to over time given that you're particularly growing the commercial business? That's my first question.

Okay. Well, to some degree, comparing the core O'Reilly stores to the CSK stores is a little bit comparing apples to oranges because of the -- as a company, it was a young company and expanding. We expanded into a lot of rural markets that really never had the top line potential that many of the metro stores that we put in as a more mature company at core O'Reilly and CSK was in when we bought them. So CSK has the potential to have the majority of the -- what was CSK has the potential to have a majority of their stores at a pretty high top line and more comparable with the metro stores that core O'Reilly has. If we compare the metro stores at core O'Reilly to the CSK metro stores, the core O'Reilly stores still outperformed the CSK stores. There's still a lot of upside on the CSK. The core O'Reilly stores are -- as a whole are dragged down a little bit by the rural stores that we operate. They just don't have that top line potential. So core O'Reilly would still be probably a little higher in those metro stores, but we -- we're working those CSK stores up to that level. And then, in some cases, we'll surpass core O'Reilly because they're -- we're in some really good markets out West that have a lot of market potential, and we're just in the process of gaining that -- forming market share, and we still have a lot of room to grow. Daniel Hofkin - William Blair & Company L.L.C., Research Division: Okay, great. And then as it relates to just back -- yet another question on the gross margin. So when you talk about the deals that -- signing near term between now and, let's say, first quarter, the impact there, that is the unit cap? In other words, just increased capitalized distribution costs? That's the drag from that?

No, we got a little -- we had a combined question back a few questions ago. There's 2 issues. There's -- these new deals are going to be a pressure on us from a LIFO accounting standpoint and create short-term margin as we write all our inventory down to those new deal prices. The other issue was a question on new DCs, and we'll see higher capitalized distribution costs next year, which is recognition for all these DCs we're going to put in place and additional inventory we'll have in salable position. And that will be a net 0 on gross margin as the capitalization of those values offset the increased cost of new DCs. Daniel Hofkin - William Blair & Company L.L.C., Research Division: Okay, so -- and in summary, you're looking for flattish year-over-year gross margin in the fourth quarter and the first quarter because of the, I guess, benefit from improved product acquisition costs over time?

Yes. The short-term pain for the long-term gain, yes.

The next question is from Michael Lasser with UBS. We'll take the next question. We have Jack Dulles with Focus Research.

I was wondering, when you took over CSK, did you have some distractions that benefited competition the way you might expect to happen with Advanced Auto Parts?

Well, that's a good question, Jack. I'd like to say no, we didn't. But I can tell you that when you do something like this, it takes a lot of energy, and it takes a lot of focus from the -- not only the top management of the company but the field team members that you put in place to do that. What we did during the CSK acquisition was we really relied on our field operations management to run the core O'Reilly stores and keep things headed the right direction. I think they did a great job. But there's -- it always takes a lot of energy out of the top management of the company to absorb the kind of acquisition that we did with CSK and Advance is working on integrating with GPI. So the answer would be yes, sure it did. It takes some out. And you do the best you can to avoid materializing in market share loss, but there's certainly that possibility that exists with any acquisition of this size.

Okay, I assume that you're still able to pretty well service your commercial accounts, I see.

Oh, yes. Yes, we kept -- we were -- we kept our eye on the ball. And all the things that -- really what you try to do, Jack, is you try to make -- the stores that are in operation that are operating and servicing customers, you try to make it a non-issue for them. You make it something that they read about on our newsletters and our communications, but you make it something that doesn't impact them. Where it can become distracting is where you're trying to maybe adapt the business to the changing market conditions, something the competitor is doing. There's just not quite as much focus on that from a top management standpoint as there would you if you weren't integrating a company. So that would be generally where I'm coming from.

Okay. One last question. Regarding SG&A, which was down for the entire company, I think there was a comment made that SG&A per store was up 0.75%. Can you explain that difference?

Would you take it?

The increase in SG&A on a -- we leverage total SG&A. But if we look at broad dollars, the growth was 0.75% per store, which is what we're expecting for the full year.

In other words, you went up 0.75% per store in an upward direction despite the entire company being down?

Oh, we're talking about dollar -- the 0.7% is dollar increase per store, Jack.

Oh, I'm sorry. I thought it was a percentage. Okay, that's good.

We have reached our allotted time for questions. I will now turn the call back over to Greg Henslee for closing remarks.

Okay, thank you, Ellen. I'd like to once again thank everyone, every member of Team O'Reilly for their hard work and their dedication to our ongoing success. You've proven time and time again that the relentless focus on providing consistent, excellent customer service is the key to our long-term, profitable growth. We remain committed to executing our proven business model in every existing and new markets that we enter. We are confident that we'll continue to gain market share by focusing on satisfying each customer who calls or walks into our stores. Thanks to everyone for their time today, and we look forward to reporting our 2013 fourth quarter and full year results in early February. Thanks.

Thank you. Ladies and gentlemen, this concludes the O'Reilly Automotive Incorporated Third Quarter Earnings Release Conference Call. Thank you for participating. You may now disconnect.