O'Reilly Automotive Inc ORLY
Q4 2010 Earnings Call Transcript
Transcript Call Date 02/17/2011

Operator: Good morning. My name is Lushey, and I will be your conference operator today. At this time, I would like to welcome everyone for the 2010 O'Reilly Automotive Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I will now turn the call over to your host, Mr. McFall, Chief Financial Officer. Sir, you may begin your conference.

Tom McFall - CFO and EVP, Finance: Thank you, Lushey. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement.

The Company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contained within this conference call that are not historical facts are forward-looking statements, such as statements discussing among other things, expected growth, store development, CSK DOJ investigation resolution, integration and expansion strategy, business strategies, future revenues and future performance.

These forward-looking statements are based on estimates, projections, beliefs and assumptions that are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses such as the integration of CSK Auto Corporation, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements.

Please refer to the 'Risk Factors' section of the Company's Form 10-K for the year ended December 31, 2009, for more details.

At this time, I'd like to introduce Greg Henslee.

Greg Henslee - CEO and Co-President: Thanks, Tom. Good morning, everyone and welcome to our fourth quarter and year end 2010 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 all the Team O'Reilly on the outstanding results, both for the quarter and for the year. Our performance across all markets in the fourth quarter continued at a strong pace and we should all be very proud of our industry-leading comparable store sales performance in 2010.

Our outstanding performance is a result of the great job our team members do living up to the reputation O'Reilly auto parts has built over the years. Customers, both do-it-yourself and professionals, have very high expectations of us based on their past experiences and our reputation in each market.

Our customers have come to expect that we will always provide the best customer service in our business, that we always have industry-leading parts availability at competitive prices, that we carry the best assortment of quality products, and more than anything that we offer friendly and professional assistance to every customer that give us the opportunity.

We sell auto parts but we're in the customer service business and we've done a great job approving that this past year. Congratulations Team O'Reilly on the outstanding results.

It's now been a little over 2.5 years since July of 2008 when we purchased CSK Auto. It's been quite a journey from the 1,830 stores and 14 distribution centers we operated in the central and eastern parts of the country at the end of 2007 to the 3,570 stores and 23 full service distribution centers we operate coast to coast today.

Some of the key accomplishments over the past three years include the addition of 1,740 stores including those acquired with CSK; the completion of a very robust distribution network in the western states, this includes our distribution center openings in Seattle, Moreno Valley California, Salt Lake City, Denver, and Stockton, California; the implementation of our hub store network in the western U.S.; the adjustments away from the promotional retail price dependent strategy CSK used to everyday low price strategy that we use in the O'Reilly stores; the changeover of the product CSK carried in their stores and distribution centers to the brands and categories that O'Reilly caries along with the simultaneous enhancement of inventory coverage that's resulted in the customizing of each store and DC inventory to fit their market; the complete conversion of computer systems in the acquired stores and distribution centers to the O'Reilly point-of-sale, supply-chain and back office systems; the display area reset and re-signing of the majority of the CSK locations with the remainder to be completed in the first half of this year, along with the long list of other accomplishments including beginning to implement our dual market strategy in the Western states.

At the end of 2007, the last full year we operated prior to acquiring CSK, we ended the year having generated $2.5 billion in revenue, 44.4% gross margin, and 12.1% operating margin. Three years later, we ended 2010 having generated $5.4 billion in revenue, a 114% increase, 48.6% gross margin, a 414 basis point increase and 13.6% adjusted operating margin, a 149 basis point increase.

Our early expectation of the acquisition was that we generate approximately $100 million in annual synergy comprised of $25 million in operating cost reductions and $75 million in merchandise cost reductions. We've clearly exceeded those expectations and with the vast majority of the conversion work behind us are well on our way to fully executing our dual market strategy in the Western half of the country.

As we have mentioned before, our goal is to bring the acquired stores from an average annual per store volume of $1.35 million at the time of acquisition to $1.8 million and we've made great progress over the past 2.5 years, and we expect continued favorable results as we work to build our commercial business this year.

Generally speaking, we are very pleased with our performance during the fourth quarter. Sales remained strong coming out of the third quarter and throughout the majority of December. These healthy trends existed in pretty much all our markets across the U.S. and yielded a strong comparable store sales increase of 9.2% for the quarter and 8.8% for the year.

These solid sales results can be attributed to several factors including the reduction in new car sales resulting in more maintenance of older vehicles, some pent up demand related to the economic recession and increase in annual miles driven in the U.S., favorable weather conditions throughout much of the year but as much as any of these factors just solid execution by our team across all markets. In the CSK converted stores, our team members have very enthusiastically adopted the O'Reilly culture and are providing outstanding levels of customer service, as they go about the task of implementing our dual market strategy and building our commercial business.

We are in a good position to build on the success we've had in the converted stores, as we continue to gain traction on the commercial side of the business and work to be recognized as the best hard part supplier in these markets for our retail customers.

We have a lot of work ahead of us to bring the converted stores up to their potential, but at the same time we have come a long way and with the key components of the strong team, strong distribution network and outstanding product availability now in place and with most of the conversion activity behind us, we feel very confident about our potential to continue our market share gains in the acquired stores.

Tom will be reviewing all our financial information in detail in a moment, but I want to just touch on a couple of key points. First, our gross margin for the fourth quarter and for the year came in at 48.6%. As I mentioned earlier, this is an incredible improvement from the mid 44% gross margin we generated prior to acquiring CSK and is a 60 basis point improvement over 2009.

Solid retail pricing and merchandise acquisition cost management are the primary contributors, but another key contributor is our distribution and supply chain management teams. They've just done an excellent job managing our expenses, as we've aggressively expanded our distribution capacity.

Over the years, we have invested in and developed warehouse management systems that utilize technologies like voice activated picking, optimized slotting, automated material handling, along with other technologies and these systems coupled with the strong distribution and supply chain management team has served us well as we've expanded our distribution footprint.

We plan to continue to enhance these technologies with use of internal resources to ensure we're able to generate additional cost of goods savings that will help mitigate the pressure of growing our commercial business faster than our retail business could have on our gross margin.

SG&A expense came in at 36.1% of sales for the quarter and on an adjusted basis 35% for the year. This was a 194 basis point improvement compared to 2009 driven primarily by the leverage created by the solid comparable store sales growth.

We work hard to control expenses and view ourselves as somewhat frugal operators that aren't afraid to make strategic investments that generate solid returns but focus on making sure our day-to-day operational expenses are kept to a minimum. Everyone in our company from the top-down (list) by the same expense control standards.

These efforts, on all fronts led our company to an all-time record adjusted operating margin of 13.6% in 2010 compared to the 11.1% we generated in 2009 at 250 basis point improvement.

Now, looking to the completion of the first quarter and for the full year 2011. I know most of you have noticed, we lowered our comparable store sales guidance from 4% to 6% fourth quarter last year to 3% to 5% for the first quarter. The reason for this guidance adjustment is due to some winter weather events in January in some of our markets that slowed the pace of our comp store sales growth. Some of our markets were buried in snow with very few travelers for a few days as road crews worked to clean up. With the highest volume portion of the quarter still in front of us, we'll see how the quarter plays out, but currently we're comfortable with our 3% to 5% comps this quarter.

Looking at to the full year, we remain confident in our ability to achieve strong results in the CSK converted stores, as well as solid comparable store sales in the core O'Reilly markets, and are providing comp store sales guidance for the year in the 3% to 6% range.

We just completed our Annual Store Managers Conference, and I can tell you, we've got an outstanding group of leaders that are very confident in the conditions that exist in our markets to grow our business. With the majority of the CSK conversion work completed, we're now able to focus more of our resources that over the past couple of years has been spent on conversion and training activity to growing market share and expanding our customer service capabilities.

We currently have several projects underway to improve our ability to provide the best customer service in our industry. These projects include providing additional robust product content for our point-of-sale systems, improved e-commerce capabilities, and improved product sourcing communities.

I will go into a lot of details of the specifics of all the projects we have underway, but will say that our Company has done an excellent job in leading of industry in store-specific inventory mixes and in robust point-of-sale and product sourcing systems over the years, and we're working hard to maintaining advantage in those areas and are focusing a lot of our internal resources on expanding our capabilities.

Looking at our industry at a high level, we believe the favorable macroeconomic conditions that contributed to our industry's strong results in 2010 will continue in 2011. The average age of vehicles on the road continues to exceed 10 years, miles driven continues to incrementally increase, and we feel that out of economic necessity, many motorist are choosing to maintain their older vehicles and keep them on the road as they work to recover from the recession.

These tailwinds could, of course, be temporary if fuel prices were to quickly rise, impacting miles driven and discretionary spending in the challenging employment environment.

Lastly, I just want to again thank our team for the all the hard work in 2010 and congratulate everyone for their outstanding performance in the fourth quarter and for the year.

I'll now turn the call over to Ted Wise.

Ted Wise - COO and Co-President: Thanks, Greg. Good morning, everyone. It's great to be able to share the outstanding results that team O'Reilly achieved in our fourth quarter and for the year. I want to start with a brief overview of some of the detail behind our new store growth.

Last year's expansion produced a $156 new O'Reilly stores, which was a net increase of 149 stores after closing seven overlapping and underperforming stores from the CSK acquisition. We finished the year with 3,570 stores.

Our expansion plan for next year is to go back to the pre-CSK growth levels which will be in the range of 170 new locations. Our fourth quarter expansion markets included 35 new stores in 17 different states. Leading growth areas; Texas with 5 new stores, North Carolina and Florida with 4 stores, Ohio and Wisconsin with 2 stores.

The yearend totals pretty much near the fourth quarter with Texas having a total of 24 new stores for the year, North Carolina at 20 new stores, Ohio was 16 stores, Wisconsin at 12 and Florida at 10. Last year's expansion reached into 24 states, with a large focus on growth out of our newer Greensboro, DC and our recently converted DC in Detroit.

We're in good share for future store growth with the addition of our new West Coast distribution centers and the ability to expand out of 23 distribution centers across the country. I might add that along with a 156 new stores, we relocated 17 stores and had 43 major remodels and store additions, as well as approximately 500 CSK store reset projects.

The CSK to O'Reilly stores resets are coming along very well and you might say we have made the fourth corner turn and we are headed for the finish line. We're currently on track to complete these resets by the end of the second quarter this year. This has been a massy project and a great accomplishment for our store design and store installation departments.

We are very appreciative of the long hours, week-after-week, month-after-month that has taken to physically reset and re-merchandise the stores. Immediately following each reset, the stores evaluated and scheduled to have additional anterior remodeling and exterior maintenance work to bring it up to O'Reilly standard.

The O'Reilly signed conversion project is also moving forward and on schedule to have over 1,000 stores resigned by the end of this quarter with the balance finished as we move into the second quarter. Needless to say, working with various rurals and the city governments, landlord approvals and the actual signed installations has been a real test of our patience.

We will be moving the stores advertising away from the CSK co-branding to a single O'Reilly message as we finish the resigning in each market. We would expect to be using the O'Reilly brand exclusively in all markets sometime in the second quarter.

The co-branding has gone very well and allowed for a smooth customer transition to the O'Reilly brand. However, it will be much more effective when we can place all of our efforts towards building the O'Reilly brand at the national level.

Our advertising message for the West Coast continues to focused on creating an everyday low price image along with the hard parts availability message. Previous CSK advertising was almost entirely plant driven which we have solely transitioned to a schedule with less (premium) but supported by much more radio advertising. We feel we have a huge DIY sales growth opportunity in our West Coast stores as we continue to build a new image of having competitive prices and good inventories which will attract more serious DIY customers that purchase more hard parts with higher margins and higher ticket sales.

In the fourth quarter, we finished our last CSK to O'Reilly DC conversion in Phoenix and also completed the store computer conversions on the corresponding 151 area stores. It is great to have the conversion totally behind us with all 1300 plus stores operating on O'Reilly systems and service (nightly) from a full coverage of O'Reilly distribution center.

Each day, our store teams becoming more proficient with O'Reilly point of sales system and our new store procedures. It's great to have the distraction of the product line changeovers and computer systems behind us and our team members better prepared and ready to use the O'Reilly tool box to grow the business.

A special thanks to over 2700 O'Reilly team members that have traveled out west from the core O'Reilly stores for weeks at a time to help install and train the western store team members on the new computer systems. While it seems like just yesterday, it has been over two years since we started the CSK conversions to O'Reilly. Looking back, this included the consolidation of one CSK distribution center, installation of six new distribution centers and the conversion of two existing CSK DCs into O'Reilly systems. During the same period, we realigned product offering, finished entire line changeovers in the stores, and converted over 1,300 stores to nightly delivery. There has been an amazing amount of planning and execution on the parts of our distribution team to accomplish each task in on such a short and time-sensitive schedule.

Now in regard to our professional sales out West, we continue to see steady growth on the professional customer business. Once again, with the new DCs in place and store computer conversions finished, we are better prepared to now concentrate on developing the professional business. The store inventory levels along with the hub and spoke system are being fine tuned to make sure that we have the right parts availability. Store staffing and additional training to ensure that we have professional parts knowledge on our First Call professional counters is a top priority for our district managers.

We have established and are following an aggressive outside sales call program to the professional customer and continue to build the relationships that will establish a customer confidence in O'Reilly and our ability to provide consistent high service levels. This is an ongoing process, but one that we see with good progress, and we're developing a store-by-store, market-by-market sales and operations plan to gain the professional business.

As in all areas that I've mentioned regarding the store conversions, we now have the heavy lifting and task-oriented part behind us and our sales and ops teams are totally focused on store execution that provides excellent customer service.

We know this will be a key to increasing our market share, and we will continue to train, evaluate, and make the additions to our team, and our field management that will ensure that we're on the right track to success in every market.

To close, I would like to say we are extremely proud of our industry-leading sales performance. Our 9.2% comps last quarter and 8.8% comps for the year are the result of our team's commitment to providing outstanding customer service. Great service levels and execution of our dual marketing sales program once again resulted in solid growth with both our DIY and professional customer. Combined the performance of our CSK conversion stores, the strong sales growth in our core O'Reilly stores and addition of our 149 new O'Reilly stores produced almost $5.4 billion in sales for 11.4 increase over last year. This could not have happened without our entire team working together and being committed to the services levels on which the O'Reilly culture is based.

We truly believe that our team members commitment and relationship with our customers make the difference in our performance. I want to thank all of our team members for the role they played in making 2010 a very successful year.

I will turn the call over to Tom.

Tom McFall - CFO and EVP, Finance: Thanks, Ted. Now, we'll take a closer look at our results and add some color to our guidance for 2011. Sales finished up the year on a strong note with comparable store sales of 9.2% in the fourth quarter. This increase was driven primarily by ticket count but average ticket also contributed.

For the quarter sales increased $137 million comprised of $106 million increase in comp store sales, a $29 million increase in non-comp store sales and a $2 million increase in non-comp, non-store sales. For the year, sales increased 11% to 5.4 billion, primarily driven by our 8.8% comparable store sales results.

For the year, ticket count and ticket average contributions were roughly even. We believe the increase in ticket count was driven by the trend of consumers continuing to retain and maintain their existing vehicles, and the increase in average ticket was a result of our product mix tending towards hard parts which typically carry a higher ticket average.

For 2010, commercial outperformed DIY due to the ramp up for the commercial business in the acquired CSK stores. We'd expect this trend to continue as we leverage the infrastructure investments completed this year in the Western markets, allowing us to fully implement our dual market strategy.

Our sales guidance for 2011 is $5.7 billion to $5.8 billion. Our comparable store sales guidance is 3% to 6% driven by the continued ramp of the commercial business and the acquired CSK stores, continued growth from the immature stores and a return to historical automotive aftermarket growth rates in the mature core O'Reilly stores as they face tough comparisons.

Gross profit for the quarter was up slightly as we saw a higher mix of hard parts sales, which typically carry a higher gross margin percentage. These gains were partially offset by an increase mix of commercial sales which carry a lower gross margin percent based on commercial customers' volume purchasing power.

Our guidance for 2011 is gross margin of 48.4% to 48.8% of sales versus 48.6% in 2010. We anticipate the following dynamics in our 2011 gross margin. The pricing environment in the industry will continue to be rational and inflationary pressures will be efficiently passed through to the consumer. We will benefit from distribution efficiencies with no new DCs opening in 2011 versus 4 new ones in 2010 and our commercial business will continue to grow significantly faster than the DIY, which will put pressure on our gross margin percentage.

SG&A for the quarter was 36.1% of sales versus 37.8% in the prior year. The improvement was driven by extremely strong cap store sales. When we look at average SG&A per store for 2010, we increase 1.2% per store versus a 7% increase in average store sales volume. We are able to achieve this leverage based on extremely strong sales and tight expense control.

Looking forward to 2011, we would expect to again see average per store SG&A increases in the low single digits as we leverage store occupancy cost in the acquired CSK stores, leverage headquarter expenses and benefit from the reduced store project costs related to conversions and training. Operating margin for the quarter was 12.5% of sales, representing a 180 basis point improvement over the prior year as we saw a strong leverage and robust sales.

For the year, we recorded a record adjusted operating margin of 13.6% of sales, which excludes the impact of legacy CSK DOJ issue. Prior to 2010, our highest annual operating margin was 12.4% in 2006. We are pleased with our results, but we feel we have many opportunities to continue to raise the bar on operating margin.

Our operating margin guidance for 2011 is 13.9% to 14.4% of sales with the expected improvement driven primarily by improved leverage of SG&A.

For the fourth quarter, our tax rate was 37.5% of pre-tax income which came in a little better than we expected based on the positive results of several tax planning strategies. For 2010, excluding the impact of the legacy CSK DOJ issue, our tax rate was 38% of pre-tax income and we expect to see a slightly higher rate in 2011.

Adjusted diluted earnings per share for the fourth quarter which includes the favorable settlement of note receivable acquired in the CSK acquisition was $0.69 per share, which represents an increase of 33% over 2009.

For the year, adjusted EPS, which excludes the favorable settlement of the note receivable and the charges related to the legacy CSK DOJ matter, was $3.05 per share, which represents an increase of 37% over the prior year.

Now we'll take a look at the refinancing plan we executed in January of 2011. We recently decided to refinance our ABL, which still had 2.5 years of remaining term, was twofold. First, we saw a great opportunity to lock in extremely favorable long-term rates, and second we saw an opportunity to reduce the working capital requirements to operate our business.

Based on our consistent track record of profitable growth, the increased size of the business, the success of the CSK integration, and our improved free cash flow profile, we're able to obtain investment grade and (Allegro) ratings from both Moody's and S&P. These ratings allowed to issue $500 million, 10-year public bonds with an effective interest rate, just under 5%.

We used the proceeds from the offering to retire ABL. Also as a part of the refinancing plan, we entered into $750 million five-year revolving bank facility. This facility is primarily to ensure ample liquidity as we do not plan to have substantial permanent borrowings outstanding on our facility.

As part of the refinancing, we will take $26 million charge in the first quarter of 2011 to write-off the remaining ABL financing cost and determinate interest rate for swaps associated with ABL. We will treat this charge as a non-recurring item in 2011.

In the upcoming years, we have a tremendous opportunity to improve our net inventory turnover. The opportunity comes on two fronts. First, is to improve our vendor terms and increase our payables. The second is to improve our inventory productivity. With the refinancing, we've moved from the secured debt structure to an unsecured debt structure. This will allow us to operate a competitive vendor financing program which will allow us to reduce overall supply chain costs and negotiate longer payable trends with our vendors. We finished 2010 with an inventory to AP ratio of 44.3% which was an improvement over the prior year 42.8%. But we significantly lag our peers and have substantial opportunity.

We'd expect to see some benefit from the new vendor financing program in the fourth quarter of this year, however we'd expect to see the bulk of the improvement in the first half of 2010 – excuse me in 2012. This delayed impact is the result of any extension of terms not being realized until the purchased made under the new longer terms reach the extended period.

On the inventory front, our average inventory per store finished the year at $567,000 which is up substantially compared to the $471,000 average prior to our acquisition of CSK. Dissecting our inventory, the core O'Reilly per store average approximates the pre-CSK levels with the acquired stores accounting for the increased store average.

During the year we will refine the inventory levels at the acquired stores in support of DCs with the excess inventory being sold through or returned to vendors.

In conjunction with the refinancing plan, our Board of Directors authorized a $500 million share buyback program. We feel the best use of the cash flows generated by operations is to reinvest in the business by opening new stores and continuing to consolidate the industry.

To the extent we do not use all the cash flow we generate by opening new stores with the appropriate returns or we cannot consolidate the industry via accretive acquisitions. We will return excess cash to shareholders by opportunistically buying back our shares.

Because the share buyback program was announced during our closed window, we have not repurchased any shares yet, but when the window reopens, we will begin to opportunistically execute the program.

In 2010, we generated free cash flow of $338 million compared with the negative free cash flow of $130 million in 2009. This dramatic improvement was a result of the 36% increase in net income coinciding with the end of the large CapEx and inventory investments in the acquired stores.

Looking at 2011, we expect to open a 170 new stores and spend between $310 million and $340 million on CapEx. Included in this CapEx spend is the last $50 million of CSK conversion CapEx. With the reduced CapEx and no expected investment in net inventory, we anticipate free cash flow to be between $320 million and $350 million in 2011.

During 2010, we reduced our outstanding debt balances by $432 million and finished the year at an adjusted debt to adjusted EBITDAR of 1.6 times. We are extremely committed to maintaining our investment grade rating.

We have stated our target leverage is 2 to 2.25 times based on the six times rent factor, and we would expect to slowly reach these targets over time as we maintain our flexibility to invest and profitably grow in the business.

For 2011, our guidance of adjusted earnings per share which excludes the non-recurring charges related to the refinancing plan mentioned previously as $3.37 to $3.47 per share. This guidance does not take into consideration the impact of any share buy backs.

In conclusion, 2010 was a tremendous year for team O'Reilly and we're looking forward to even better year in 2011.

At this time, I'd like to ask Lushey the operator to come back and we will be happy to answer your questions. Lushey?

Transcript Call Date 02/17/2011

Operator: Dan Wewer, Raymond James.

Dan Wewer - Raymond James: Greg, to follow-up on your comments of CSK progress, you noted that when you purchased the store they were averaging about 1.35 million in sales per location, was it goal about $1.8 million. As I recall there are some markets like Houston and Dallas where you do over $2 million per store given that you've own those stores now for 2.5 years. Where are you on that progression from 1.3 million to 1.8 million?

Greg Henslee - CEO and Co-President: Well, we've made good progress. We're trying to avoid giving the comp store sales of our stores by markets and by store types just for competitive reasons, but I guess what I would say is that we made progress. If you look at it like even a baseball game, I'd say we're in the second, third innings, something like that with a lot of the game still ahead of us. But we're further down the road than we would have thought we would have been at this point in time.

Dan Wewer - Raymond James: So that's a nine inning game and you're three innings into it?

Greg Henslee - CEO and Co-President: Yes, something like that.

Dan Wewer - Raymond James: I'll call about a third then.

Greg Henslee - CEO and Co-President: Something like that.

Dan Wewer - Raymond James: The other question on the inventory strategy going forward, just trying to make sure I understand. Your goal has actually reduced the gross inventory dollars at CSK during the next 12 months, for the former CSK stores?

Tom McFall - CFO and EVP, Finance: That's correct. Because of the duplicative inventory that we had in place when we moved Dixon to Stockton, we had two distribution centers worth of inventory there that were unnecessary, and also the hub store network that was really overbuilt to get us in the commercial business ahead of us having all of our distribution centers open, and just the method by which we address putting inventory in those stores, we have more inventory on average in those stores than we really need we'll working to work that down to the appropriate levels over the next 12 months. We've been working on that already, but we just have a lot of progress yet to make there.

Dan Wewer - Raymond James: So there's not any temptation to take advantage of the anticipated growth in payables as it relate to justify increasing your gross inventory.

Tom McFall - CFO and EVP, Finance: That isn't our part of our plan right now, no.

Operator: Kate McShane, Citi Investment Research.

Kate McShane - Citi Investment: You had mentioned that you're planning to pass higher pricing through in light of some of the inflationary trends we're seeing. Are there other specific products that you're raising prices on, and is it fully in line with cost, and what is timing of that?

Greg Henslee - CEO and Co-President: Well, I think as our competitors do and most retailers do, we constantly shop our competitors to make sure that our retail prices are competitive. Generally, the prices that Tom was talking about or items that we would consider, commodities or items that are related to specific raw material cost that typically would be cost that if we receive increases or competitors would receive increases, and I think what we've seen any way for the last several years is that our industry is pretty rational when it comes to passing along those cost increases. So, primarily, we're talking about just passing along the raw material and commodity cost increases along with our competitors.

Kate McShane - Citi Investment: In regards to some of the external factors that could impact your business, was gas prices up a fair degree already? Have you seen this directly impact your comp store sales so far for Q1?

Greg Henslee - CEO and Co-President: We have not. I think the increases that we've seen have been pretty gradual. We've not had a quick spike in fuel prices to this point and we've not seen an impact that we would related specifically to gas prices. As I mentioned in my earlier comments, our first quarter isn't – we didn't start off as strong as what we ended the fourth quarter that we relate that to these weather events that we had because they were specifically on a daily basis related to those weather events. We're not relating at this point to anything other than that, although we understand that increased gas prices take away from some of the discretionary spend and with some of the income tax refunds not coming as early this year as they did last year that that could have some minor impact, it's very difficult for us to measure.

Operator: Tony Cristello, BB&T Capital Markets.

Anthony Cristello - BB&T Capital Markets: I guess the questions – one of questions that I wanted to touch on is if you look today versus, say, three years ago, can you maybe talk a little bit about the categories that you're seeing that are showing particular strength that maybe three years ago didn't and how has that impacted the pricing in margin of parts being sold today versus (then)?

Greg Henslee - CEO and Co-President: Well, I think the robust categories are probably pretty similar. We've seen good growth primarily in hard parts categories. I think ignition emissions is a category that has probably improved some in the more recent years just because of the complexity of automobiles and the components that had to do with emission and ignition, they have to be replaced at higher mileages. Those products run at approximately the same margins now as they did then relative to our buying power. We make better margin now across all lines relative to our buying power, but I don't think we've seen a material shift by category into categories that we make better margin on now than we did in 2007, it's been more across the board.

Anthony Cristello - BB&T Capital Markets: So if we then look at the pricing and the margin, if we're saying that they are same and the categories are staying the same, then how do you then manage the product sourcing or refinement of the supply chain which I think are a couple of things you talked about to help improve than your overall gross profit?

Greg Henslee - CEO and Co-President: Well, we continue to move some of our products to private label to satisfy our customers' desires to buy lower cost products. Those products typically come at a lower selling price, maybe a lower gross profit dollar, but a higher gross margin percentage. So, that's one change that we're seeing and we're pursuing. The ideal situation for us is to build some of our private labels into more premium brands which we pursue. Then as the import car market or selling parts for import cars becomes a larger percentage of our business, I think we have an opportunity to grow our gross margin with some private label branding that we can do on (OE) fit, form and function private label products.

Ted Wise - COO and Co-President: I might to Greg's comment. We're seeing a slight trend where our professional customers are not quite as brand-sensitive. They are very well willing to take up private labels as long as it is a premium private label.

Greg Henslee - CEO and Co-President: Part of that has to do, Tony, as you well know from your involvement in our industry with the quality of the private label products. There's been a lot of change with some of the private label suppliers over the past several years to a higher quality product and the difference between private label and branded from just a product quality, (fit), function standpoint, it's not nearly as prevalent today as it was a few years back.

Operator: Chris Horvers, JPMorgan.

Chris Horvers - JPMorgan: I was curious, was January a negative month and I know it's your only part of the way to February, but can you talk about how trends have rebounded, maybe (supply citing) whether it's on a company basis or a particular markets that where the snow cleared out faster?

Greg Henslee - CEO and Co-President: No, January was not a negative month. We would have been extremely surprised if the few days that we had that affected the month that contributed to the softer overall comps would have caused us to be negative but that did not happen. The winter time with storms coming through, it's always hard to kind of measure how the overall business is trending because these events can be so impacting the business. I can tell you that today, we are in the range that we gave for the quarter and that we would expect that we would finish the quarter at least in that range.

Chris Horvers - JPMorgan: So on a different topic, can you talk about the – just one thing broadly about pricing and both on the west coast and perhaps your top two growth markets on the new store side. How you think about your pricing prices versus your biggest competition?

Greg Henslee - CEO and Co-President: Well, I think we're price competitive with our biggest competitors. We shop our competitors every day as they do us, I'm sure to make sure they were price competitive and we work hard on a wide array of SKUs to make sure the retails on our products are set competitively, trying to use various strategies to make sure we maximize our gross margin. On the commercial side, it's a little tougher than that because you have a wider array of competitors, and it's hard to find out sometimes what your competitors are actually selling a commercial customer for, but we have strategies that we use for that. I would say that when it comes to full service providers on the commercial side that we're competitive with all of them, and look at that on a by market basis, and we have very developed systems that are capable of setting our commercial prices and allowing us to manage our commercial prices on a by market or a by store or a by customer basis. When it comes to some of the smaller competitors that we have in the various markets, we call them, two steppers or under (car) warehouses. Sometimes these competitors can buy direct from sources in China and other countries on brake rotors and some of the primary major hard parts items, and they can be very competitive. I would tell you that in some cases where we compete with competitors who are not full-service providers, will get on beat on price in the certain category or two. But generally if you looked at everything that we sell a customer, we're going to be competitive with anyone out there.

Chris Horvers - JPMorgan: Like there's not as if there are – some of these growth markets whether it's in new stores at West Coast where there are some established competitors in there who are full service providers who are pricing above you. That's where you can take share from?

Greg Henslee - CEO and Co-President: I think there is that situation. I think that some of our major competitors on the more traditional side of the business because of the type of distribution that they are in, many of them are subjected to three step distribution, so they are buying as a jobber store on many of the product lines and in some cases they may be buying directly from a manufacture. But typically and generally some of those competitors would be under pressure to compete with us on price at our normal commercial pricing. So, those competitors are yes much easier to take business from.

Chris Horvers - JPMorgan: So, that's not like an Advance or GPC or Zone?

Greg Henslee - CEO and Co-President: Typically not, no.

Operator: Colin McGranahan, Bernstein.

Colin McGranahan - Bernstein: First question for Tom, just thinking a little bit about the capital structure and share repurchases and the timing of that, you used the world opportunistically on share repos but your target leverage ratio is about a half a turn, your currently leverage ratio is about half a turn below the target?

Tom McFall - CFO and EVP, Finance: Colin, did we lose you? Operator, did we lose Colin?

Operator: Yes, sir.

Tom McFall - CFO and EVP, Finance: Maybe we can go to the next question and hopefully Colin will call back and we'll get him back on the call.

Operator: Alan Rifkin, Bank of America.

Alan Rifkin - Bank of America: Question for Greg and then I do have a follow-up. In trying to determine exactly what the progression of revenues are from the 1.35 to the goal of 1.8, would you maybe be able to shed some color on whether we should assume that that progression is linear or if we look back at stores in the upper Midwest or stores that was supported let say by the Seattle, D.C. which were earlier in the program, how were those relative to the corporate average today?

Greg Henslee - CEO and Co-President: Yes. There is, of course, wide variation in the progression of individual or converted stores and as we've spoken to before, the stores that we converted first continue even in the fourth quarter of last year to perform the best from a comp percentage standpoint. Most of those stores were located in the center part of the country and they continue to be very well and if you looked at the converted stores, you can just kind of follow track with the traction that the stores have relative to the amount of time that they have had post-conversion to adapt our systems, gain traction with relationships, with commercial customers, and just all the things that would allow us to be successful with execution of our business model. So, it's not nearly linear, it's very much weighted to the amount of time that the stores have been converted.

Operator: Scot Ciccarelli, RBC Capital Markets.

Patrick - RBC Capital Markets: This is Patrick (indiscernible) sitting in for Scot Ciccarelli. Looking at the 170 stores you have planned for 2011 and now that the DC infrastructure has been rolled out on the West Coast, I was wondering if you could update us as to your stores financial plans out on the West Coast and where do you think your growth prospects are further down the road?

Ted Wise - COO and Co-President: For the last three years, basically, we have been trying to get our arms around our present locations and the lease and just what our opportunities are. We've just added another real estate person in California. We've had two working on it. So, we've got a number of stores in the pipeline. As a matter of fact, we actually installed two new stores out there last year and we relocated several. So, we'll be ramping up the growth out there. There is no question about it and there is also quite a few opportunities for relocations out of strip centers and the prototype stores, so we're kind of addressing on both angles and really expect the West Coast to probably be in the range of maybe 25% of our growth for the next couple of years. The pipeline to get a store in and if it's a build-out, it's going to be a little longer process out there from a permitting and construction.

Patrick - RBC Capital Markets: I guess just one follow-up, if I may. You gave a breakout on traffic versus ticket on the past sales, but I was wondering how you see those two dynamics playing out, looking down the road?

Greg Henslee - CEO and Co-President: Traffic and average ticket?

Patrick - RBC Capital Markets: Yes.

Greg Henslee - CEO and Co-President: Well, we think our average ticket will continue to increase as we roll in more commercial sales since the commercial sales ticket is generally higher than the retail sales. So, we would expect our average ticket to outpace our traffic by a little bit.

Tom McFall - CFO and EVP, Finance: In the mature markets, we would expect that to be, what Greg said, in the CSK markets because we still have such a – and not nearly the penetration we think we can get in those markets, we would expect ticket count to drive us in those markets.

Operator: Alan Rifkin, Bank of America-Merrill Lynch.

Alan Rifkin - Bank of America: I did have a follow-up for Tom. With four DCs opening in 2010 versus none in 2011, were there any costs associated with the DC openings in 2010 that were expensed that hit your SG&A line that we won't' see in 2011?

Tom McFall - CFO and EVP, Finance: Well, our DC cost hit our gross margin line, and the answer to that is, yes, opening DCs, we start with the staff that's not nearly as efficient as they will be when they are fully trained. In case of the move from Dixon to Stockton, we saw duplicative operating expenses. So, we view our distribution efficiencies as a source of gross margin improvement in 2011.

Alan Rifkin - Bank of America: Tom, would you be able to quantify what those were in the gross margin line in 2010?

Tom McFall - CFO and EVP, Finance: Our distribution cost as well as our competitors is something that we don't talk a lot about, but we'd see the opportunity for substantial improvement this year from a training standpoint as we move forward and grow the CSK store volumes, we'd expect to see leverage on fixed costs.

Operator: Colin McGranahan, Sanford Bernstein.

Colin McGranahan - Bernstein: Tom, I was asking about the progression of the capital structure and share repurchases. You used the term opportunistically, but it looks like you'll have around $300 million in cash, you're half a ton below the target. So that would imply, you could add as much as a $.5 billion of debt, how opportunistic versus steady and how quickly would you think you'd want to get to the target ratio? In other words, should we expect (you to be) floating debt again in 2011, as you work toward that in buying back 0.5 billion plus of stock here?

Tom McFall - CFO and EVP, Finance: I would break that question into two pieces, to the extent that we have excess cash beyond our capital requirements, we will buy back shares. When we look at the debt side of the equation, we're going to be measured and how fast we come up to a 2 to 2.25 leverage. We still have the number of opportunities to consolidate the industry. We will make sure we have enough dry power to do that if one of those opportunities comes up. So, we would expect over the next probably two years to walk up to that 2 to 2.25 times.

Colin McGranahan - Bernstein: Should we expect look like option dilution is about 3% this year and 3% last year, obviously a couple of really nice years for you. Is that a normal rate or is that elevated just because you've been performing so well.

Greg Henslee - CEO and Co-President: Well, we issue a number of options as part of our compensation program all the way down to store manager levels. We had quite a few options – and then historically we've issued options on acquisitions. So, we issued quite a few options to motivate our team on the CSK acquisition which we feel has been a bit contributor for us. So, we'd expect it to be maybe slightly less than that.

Colin McGranahan - Bernstein: Just one quick follow-up question for Greg, I know you are not going to give us comps by brand, and since you are not going to give maybe you could give us expectations if you just think about your 3% to 6% outlook for '11, I would expect commercial obviously is going to faster than DIY but if you think about the core O'Reilly stores, how would you think about DIY and those stores relative to 3 to 6 commercial in those stores relative to 3 to 6 and then CSK is kind of a standalone relative to the 3 to 6?

Greg Henslee - CEO and Co-President: I can tell you in our 3 to 6 guidance, we're laying the CSK stores contribution as heavier than the – or better performing than the O'Reilly stores. The O'Reilly stores this past year had good DIY and good commercial store sales growth really the comp percentage of those stores was pretty similar. The CSK stores of course the commercial business grew faster than the DIY business and on balance the consolidated company the commercial business grew faster than the DIY business. So, I guess, what I would say is that without giving a number, we expect the CSK stores to grow faster. We expect the core O'Reilly stores to continue to do better than the industry in general and we have been very pleased with the performance of the stores from a comparable store sales standpoint this past year relative to our competitors and relative to the different industry measurements that we have to try and gauge our market share in each market. We would expect 2011 to be another good year for those stores tempered from a comparable store sales perspective by the comparisons to the good year that we had in 2010.

Operator: Michael Baker, Deutsche Bank,

Michael Baker - Deutsche Bank: So my question is, in that progression from 1.35 to 1.8, my assumption is that most of that growth comes on the commercial side, yet you did mention having robust DIY improvement opportunities. So I am just wondering within that 1.8 number, I mean have you assumed improvement in both or would improvement in the DIY be upside to that?

Greg Henslee - CEO and Co-President: We are assuming not a lot of – not robust improvement on the DIY side and robust improvement on the commercial side. I think Ted's comment and not to speak for Ted, but I think his comment is that there is a lot of DIY business being done on the West Coast and we feel like that we are not getting the share that we should have of that and that we have an opportunity to do a lot more business DIY than what we are doing today and we are working via various marketing strategies and customer service strategies to try and take advantage of that. At the same time, we are working to execute the business model that we have been successful with in the central part and eastern part of the country with regard to doing the commercial business out of the retail stores.

Ted Wise - COO and Co-President: My comment on the DIY as you may know, the CSK kind of retail book of business was very promotional driven, chemicals, oils and had a small amount of hard parts, of course, that's based on the market, and it pulled a lot of inventory out over the year. So, they just really run their retail hard parts business down and there is a lot of a business out there for us to grow. It's going to take the brand becoming stronger out there so it'll be a process to just build the O'Reilly brand because they've got good suppliers out there to go to right now, so it's going to be a hard work but the opportunity there is pretty significant I think.

Michael Baker - Deutsche Bank: As a follow-up, just want to follow-up on the comment that some of the earlier conversion stores Midwest continue to be the best performing stores. Are those comps and those markets in maybe in Seattle or the first West Coast market, are they still accelerating in other words, are you still – I guess, even most mature markets still sound like not even close to where you – and actually will be on the converted CSK sort of, is that a fair statement.

Greg Henslee - CEO and Co-President: Yes, it is a fair statement. They are still accelerating.

Michael Baker - Deutsche Bank: Thanks.

Greg Henslee - CEO and Co-President: You bet. Thank you.

Operator: Michael Lasser, Barclays Capital.

Michael Lasser - Barclays Capital: Two quick questions. One, what is driving on acceleration, is it still leering in new customers or is it the existing, moving up the cost of the existing customers and just in case I get off. Second question is, new store productivity, the rate has slowed a bit over the last four quarters, what's impacting that?

Greg Henslee - CEO and Co-President: To answer your first question, Michael, on the new customers versus existing customer in some of the earliest conversion stores. What I would tell you is that when we put a commercial programming at the store, we typically would go out and try to develop preliminary relationships with really every customer in the market, set up accounts, let them know who we are, what we do and start working to gain some other business. So what I would say is that while initially you would establish some relationship with all those customers in a given market, you wouldn't get business from many of them for some time until they gave you some work and develop the relationship. So it's a mix of new and existing customers that allow us to grow, depending on how you characterize what's new or existing. For most part, all these customers are relatively new customers to us, but they are customers that, for instance, in the case of (the bay area around Labec) that we distribute to Mexico and West Texas for Minneapolis, most of these customers have had account set up for some time, and we just incrementally gained traction with them as we've developed relationship and showed them what we're capable of doing, and then, Tom, the you want to answer the new store question?

Tom McFall - CFO and EVP, Finance: On the new store productivity, when we look at the actual numbers, our new stores continue to do very well. When you look at the comparison to '09, in '09, we had some store closures for remodel some periods of time from last year compared to this year, so I think you got that going around in the non-comp store bucket. That's creating the (appearance) that they're not doing as well, but from our standpoint, they continue to do exceedingly well.

Michael Lasser - Barclays Capital: Would you expect it to revert to the historical 70% range in 2011 and beyond?

Tom McFall - CFO and EVP, Finance: We would expect to continue to see solid results. We look at what's the actual productivity of the stores against our metric as opposed to the 70%, but it'll – not surprisingly when we look at new store productivity this year, it was a good year for our industry. The stores had opened this year, opened above our historical average. When we look at stores that opened in slower periods, '07, '08, we saw those stores come back up to what our historical growth rate would be, so it was a great year for our new stores, immature stores.

Ted Wise - COO and Co-President: A lot of times this is kind of the class of store as you grow in and open up the new market like the Southeast or the upper Midwest, the first year to that group of stores might not be as open as aggressive as the next year as you fill out of market and the brand gets known and you recruit better people and you just get more traction in a market. So it's a timing issue a lot of times as we rollout new markets.

Operator: Brian Nagel, Oppenheimer.

Brian Nagel - Oppenheimer: Just a quick question, to follow-up a lot of questions with respect to your West Coast progress, but as you look at the commercial build out there and we're expecting you're in early stages, do you see anything different that makes that market unique versus what's the build-out elsewhere in the country so far?

Greg Henslee - CEO and Co-President: I think it's very similar. The primary difference is, is that the car populations in some of the West Coast markets are significantly different than some of the center of the country markets probably more similar to some of the east coasts markets where you have a higher population of import cars. The competitive – the list of competitors out there are, of course, different. We, of course, have the national competitors that we would have in every other market absent advance, but we have different local competitors, small change and two step operations or undercar warehouses that are different competitors, but operate much the same as the competitors do in the central and eastern part of the country. So, I would say it's very similar absent just some variations that we have in vehicle population dynamics that we deal with in various markets across the country.

Brian Nagel - Oppenheimer: Just a quick follow-up if I could. I think some else asked a question about the weather and you obviously addressed the weather in your prepared comments, but the question obviously you lost some sales in January, have you seen any evidence yet that the harsh weather has led to a sales boost here early in February as people have to fix cars?

Greg Henslee - CEO and Co-President: We had – in the past couple of weeks you have kind of a – we have had kind of good weather trend just kind of an early spring in many markets and when you have those trends, you see a boost, you generally don't expect those kinds of boost to sustain, but you always hope they will. But it's hard to look into the future and know what comparable stores sales are going to do, but it's pretty easy for us to look back and see what happened with these major storms that came through and realize that they impacted business because people were moving. There were towns that in many cases aren't prepared to deal with. There was much snowfall as they got, it basically shut the town down for a couple of days. We typically wouldn't have a rebound effect from those type of weather events because people just weren't driving in their cars.

Operator: We have reached our allotted time for question and answer. Mr. McFall, do you have any closing remarks?

Tom McFall - CFO and EVP, Finance: Why don't I turn it over to Mr. Henslee.

Greg Henslee - CEO and Co-President: Yeah, I would just say that I again want to say thanks to our team for the great job that they did in 2010. We are really proud of the year we had and we are working hard in the first quarter to make sure that we finish with strong results in the first quarter and look forward to reporting those to you once we complete the quarter. Thanks.

Operator: This concludes today's 2010 O'Reilly fourth quarter and full year earnings release conference call. You may now disconnect.