Operator: Good morning. My name is Shonda, and I'll be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Auto Parts First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.
I will now like to turn the call over to Mr. Tom McFall. You may begin your conference.
Thomas G. McFall - EVP of Finance and CFO: Thank you, Shonda. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement.
The Company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will, or similar words.
In addition, statements contained within this press release that are not historical facts are forward-looking statements, such as statements discussing among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenue and future performance. These forward-looking statements are based on 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 regulations, the Company's increased debt levels, credit ratings on the company's public debt, the Company's ability to hire and retain qualified employees, risks associated with the performance of acquired businesses, such as CSK, weather, terrorist activities, war, and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors' section of the Annual Report on Form 10-K for the year ended December 31, 2011, for additional factors that could materially affect the Company's financial performance. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
At this time, I'd like to introduce Greg Henslee.
Gregory L. Henslee - Co-President and CEO: Thanks, Tom. Good morning everyone and welcome to the O'Reilly Auto Parts first quarter conference call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Ted Wise, our Chief Operating Officer. David O'Reilly, our Executive Chairman is also present.
It's my pleasure to again congratulate Team O'Reilly on another outstanding performance in the first quarter and to the great start we're off to in 2012. The 7.4% comparable store sales increase we achieved on top of the 5.7% increase we generated in the first quarter of 2011 was a significant accomplishment, and we should all be very, very proud of our Company's performance.
Included in our 7.4% same-store sales gain was the impact of Leap Day, which we contemplated in our 4% to 6% guidance and have historically included in our comp store sales. Excluding Leap Day, same-store sales gains were still a very robust 6.1%. We're also pleased to report we saw sequential sales improvement from the fourth quarter in virtually every area of our business. In historic markets, DIY and do-it-for-me were both strong contributors to our comp store sales increase. In the acquisition markets our professional installer business continues to grow at a high rate. The DIY business was also a positive contributor in these markets, and it incrementally improved throughout the quarter as we got off to a slow start at the beginning of the quarter driven we believe primarily by the lower miles driven in the Western U.S. in January, which were negative 1.5% compared to the remainder of the country at a positive 2.4%. For year-to-date February, which is the latest data available, total miles driven has increased 1.8% despite average gas prices having increased by 10% as compared to last year.
It's always difficult to determine the exact impact of weather on sales, but for the quarter as a whole, the mild winter and early spring weather definitely had a positive impact. In cold-weather markets the mild winter hurt some cold-weather categories such as antifreeze, washer solvent and wiper blades. This was more than offset by the positive impact of the early spring weather on categories such as brakes, suspension, oil changes and appearance chemicals as our customers were able to take advantage of the nice weather to perform maintenance on their vehicles earlier in the year than typical.
Comp store sales increases were relatively consistent throughout the quarter. As we look forward to the second quarter, we remain somewhat cautious regarding the sales environment and are setting our comparable store sales guidance after 3% to 5% range. The beginning of the second quarter has gotten off to a somewhat slower start as we suspect a good amount of spring clean up business was pulled forward from April into the first quarter as a result of the earlier than normal mild temperatures.
In addition, while gas prices have decreased a little over the past few weeks they remain high and we feel that this could negatively impact miles driven and consumer spending. However, we remain confident in the increasing average age of vehicles on the road and consumers who remain under economic pressure will continue to drive solid demand in the automotive aftermarket.
In addition to generating robust comp store sales increases, we were able to maintain our momentum on the gross profit line, as pricing remained rational in the industry. For the quarter, gross profit as a percent of sales increased 130 basis points over the prior year. This improvement was a result of improved merchandise margins, driven by acquisition cost improvements and our continued conservative and more focused advertised price strategy.
In addition, strong improvements in the productivity of our distribution centers were a major contributor to our gross profit results, and Ted will discuss that performance in more detail in a moment.
Continued favorable trends on inventory shrinkage were also a contributor and I'd like to acknowledge the fine efforts of our store operations and loss prevention teams for driving down shrink and keeping it at our historic low levels.
When we look at the sequential change in margin from the fourth quarter of 2011 to the first quarter of 2012, overall margin is relatively consistent. However, the composition is somewhat different with better distribution center efficiencies, mostly offsetting lower merchandise margins, resulting from sharper advertised prices on DIY traffic drivers in the first quarter compared to the fourth quarter.
We are optimistic we can continue to offer our customer's attractive call-to-action advertised prices, while protecting our margin, and we are confident we will continue to see improved leverage of our distribution costs. As a result, we are increasing our full year gross margin guidance by 50 basis points to 49.4% to 49.8% of sales.
Now I like to take a few minutes to highlight three of the many initiatives we currently have underway, that will continue to enhance the level of service we provide our customers. First, we continue to be very excited about the proprietary electronic catalog we are developing. With the ongoing proliferation of SKUs in our industry, the electronic catalog is the key selling tool our team members use in our stores. Our ability to manage the content of our catalog and how the data is presented is a critical tool in equipping our team members to provide the best possible customer service.
Over the past few weeks, I've spent time in the pilot stores specifically to observe our store teams' interaction with customers using the new catalog. The functionality of the system, the breadth of the product catalog, the ease-of-use and the data we capture on lookups are all substantial improvements over our existing system, and I would like to thank all the team members who have helped build, develop, implement, and test this fantastic new system.
We are currently nearing the end of the pilot phase in 62 stores, and plan to have the new electronic catalog installed in most stores by late summer. We'll continue to update you on the rollout of this very important initiative, and while there will not be an immediately measurable increase in the sales from this implementation. We are very confident the increased level of customer service we are able to provide our customers will result in continued strong sales growth over time.
The second initiative focuses on our never-ending efforts to enhance our inventory availability. Over the next few quarters, we will add approximately $80 million to the inventory stocked at the store level. Our goal is to have the parts our customers want on our store shelves even more often than we do today and to rely less heavily on pickups from our hub store and distribution center network, although our very robust network will continue to play a critical role in providing quick delivery for harder-to-find parts. The main inventory additions will focus on augmenting our store stocking levels to cover the vehicle demographics for a larger radius around the stores and enhancing the stocking levels of immature stores to ensure our store teams have all the tools they need to maximize their market share in these new markets.
For the year we expect about half of this additional investment to be offset by reductions of excess inventory in the acquired stores and distributions.
The last initiative I'd like to touch on is our efforts to continue to tailor our product offering to changes in customer preference. During the course of the recession, we've seen a continual trend for customers to trade down the value spectrum. National name brand parts, continues to be a key component of our product offering, especially on the professional installer side of the business. However, with higher demand for good and better products we are increasing our focus on our private label brands.
The use of private label brands gives us better control over the application coverage we make available allows us to provide an exceptional value versus quality balance and improves our gross margins. We will continue to tailor our product offerings to meet customer demand and our private label brands, which currently comprise approximately one-third of our sales volume will be an important part of this mix shift over time.
In closing, I would like to thank all of team O'Reilly for your focus on providing the outstanding customer service levels that we offer our customers every day. Your hard work, dedication and expense control focus during the quarter resulted in a company record operating margin of 16.2% and an increase in adjusted earnings per share of 37%. I think it goes without saying that we remain very optimistic about the future results our company will achieve.
I'll now turn the call over to Ted Wise
Ted F. Wise - Chief Operating Officer: Good morning everyone. Thanks Greg. The first quarter clearly demonstrates the fantastic results team O'Reilly can generate when hitting on all cylinders. By executing our dual market strategy and adhering to our Live Green culture, we were able to generate robust sales growth at very strong gross margins. At the same time control our expenses resulting in a record operating margin of 16.2%.
Looking our historic market, there's no doubt that the mild weather was a tailwind in many of these markets. However, I would like to commend our team for providing excellent customer service and capitalizing on the additional sale opportunities that the weather provided. Quarter we opened 69 new stores in 21 different states, but not more than 10 new stores in any one state. With our 23 distribution centers all with additional growth capacity we've been able to spread our growth out across the country, without high concentration of growth in any individual market. The store operations and professional customer sales teams have been able to build their management benches and new stores opening with better, seasoned and trained store teams.
Of the need to manage the store resets that we completed in the last few years, our management teams in the acquired markets out West have been able to focus on fully implementing our dual market strategy. This sole focus is definitely evident as the management and sales teams better understand the system, products and the programs we are able to offer our customers. The store operational leadership in the acquired markets has improved greatly and store execution is remarkably better, but we continue to focus on training to build on the momentum we created. We continue to see great opportunities to build the business in these markets as we improve the consistency of our store operations, build stronger relationships with our professional customers and the O'Reilly brand recognition incrementally increases over time.
One of our main focuses across entire chain, continues to be to build our DIY business. In addition to the electronic parts catalog and the inventory initiatives Greg touched on earlier, we remain focused on several operational initiatives to improve customer service. These include, improving our e-scheduling system to better align our staffing with customer tracking, especially on nights and weekends. Enhancements to our e-training capability, and introduction of a new program called (WE) that's designed to better identify, train and mentor high potential team members.
We feel the store level will continue to have tremendous opportunity to grow both the DIY and the professional installer business. I would like to thank the store teams for the great customer service they provide during the quarter, while continuing to be excellent expense managers.
Next, I would like to spend some time discussing the results and highlighting some of the initiatives from our distribution team. I won't go into specific numbers. Our distribution set very aggressive goals for 2012. In 2011, the new DCs in the acquisition markets incurred substantial costs, supporting the (indiscernible) changeovers and reducing overstocked inventories in the system, that had built up initial hard parts changeovers.
As you recall, we had 170 new stores in 2011, while actually reducing inventory by $38 million. With the changeovers complete and most of the excess inventory eliminated from the system, the DCs and the acquisition markets are fully focused on improving their efficiency by continuing to train their teams, and through the first quarter are accomplishing their aggressive plan. The DCs in our historical markets continue to perform exceptionally well. Since they are a competitive group committed to providing outstanding customer service while controlling cost, they have also set aggressive improvement goals.
Over the past three years the distribution team has accomplished the remarkable feat of opening 5 new DCs, converting two acquired DCs into our system and processes, and relocating one DC, while never missing a beat to providing outstanding customer service to our stores. Now we're excited to have the opportunity to go back and implement additional efficiency projects in our existing DCs. A few of these projects included continue to roll out paperless voice directed work out (indiscernible) which is three that have not been converted from the paper based system, and then also including (indiscernible) updating material handling system throughout the entire DC. We are confident we will see good returns from these DC retrofit projects.
I'd like to thank our (indiscernible) customer service they provide our stores day in and day out. Their ability to provide industry-(indiscernible) while controlling cost is a major factor in our 136 basis point, year-over-year, improvement in gross margin.
Now, before I turn the call over to Tom, I'd like to touch on two additional areas, advertising and new store growth. On the advertising front, our ability to focus on the O'Reilly brand has dramatically improved the impact and efficiency of our advertising spend.
Our brand recognition in both existing and new markets has benefited from our new national TV advertising campaigns. We are pleased with the result of our advertising initiatives and are optimistic about the prospect of building our brand recognition moving forward, as we continue to build on our operational momentum in the acquired markets and leverage our national platform for promoting the O'Reilly brand.
Regarding to store growth, during the quarter as I mentioned earlier, we opened 69 net new stores. This is a record number of new stores for the first quarter, as the (indiscernible) to progress very smoothly in cold weather markets, and complete new stores at normal weather markets into the second quarter. In general, we continue to see great opportunities for expansion at affordable prices, as the ongoing macroeconomic climate puts pressure on real estate prices.
In addition, we continue to upgrade our adjusting store base. During the first quarter we relocated 10 stores, eight of which were upgrades to former CSK stores and we also completed 19 major renovations. Thanks to our new store installation teams and to the new store teams for all your hard work and dedication. We are off to a great start in 2012, and are very comfortable we will hit our goal of opening 180 net new stores this year.
Now I'll turn the call over to Tom McFall.
Thomas G. McFall - EVP of Finance and CFO: Thanks Ted. I will take a closer look at our results and add some color to our guidance. Comparable store sales for the quarter, excluding Leap Day increased 6.1% on top of the prior year comps of 5.7%, with professional sales driving a higher portion of the gain, however DIY sales were strongly positive. Increase in average ticket accounted for the comparable store increase with flat customer count comps. DIY traffic improved as the quarter progressed, but continue to be under pressure during the quarter based on the difficult macroeconomic factors, consumer space.
For the quarter, sales increased $147 million comprised of $101 million increase in comp store sales, a $44 million increase in non-comp store sales, a $3 million increase in non-comp, non-store sales and $1 million decrease from closed stores. For the second quarter, our comparable store sales guidance is 3% to 5% as we believe some portion of the spring business we usually generate in April shifted into the first quarter due to the mild weather. Our sales guidance for 2012 is unchanged at $6.15 billion to $6.25 billion. Our full-year comparable store sales guidance is also the same at 3$ to 6% driven by strong growth in the professional side of the business, especially in acquired market and a slower growth rate on the DIY side of the business.
Gross profit for the quarter increased 136 basis points over the prior year to 49.8% of sales. The larger contributor to the increase was the improved distribution efficiencies, which we expect will continue for the next few quarters as we finish cycling the cost of last year's frontend reset and excess inventory returns. The increase also was supported by improved merchandise margins resulting from improved acquisition cost and more conservative focused advertised price strategy versus last year's first quarter. As Greg mentioned earlier, we're increasing our 2012 full year gross margin guidance to 49.4% to 49.8% of sales. We anticipate the quarterly gross margin to be relatively consistent across the three remaining quarters.
During the quarter, SG&A improved 61 basis points to 33.6% of sales. The extra day in the quarter, helped leverage approximately 15 to 20 basis points, but this tailwind was mostly offset by a 50% increase in new store openings during the quarter, as new stores carry a much higher SG&A rate. Drivers of the expense leverage included strong sales, the mild winter, weather, lowered expenses on expenses such as utility and snow removal, and better leverage on our advertising spend, as a result of our ability to effectively utilize national advertising medium. These positives were partially offset by higher store level payroll, as our operations teams dynamically adjust store by store payrolls, to ensure we have the store level hours we need to grow the business.
Our current plan is to continue to run at a higher spend on store payroll for the remainder of the year, as we work to capitalize on our customer service initiatives. As a result, we now expect to be in the upper end of our annual per store SG&A guidance, which is an increase of between 1.5% and 2%. Operating margin for the quarter was 16.2% of sales, representing 197 basis point improvement over the prior year, as we saw strong sales and gross margins combined with good expense control. Based on our first quarter performance, our increase in expected full year gross margin as a percent of sales, partially offset by higher expected store payroll, were raising our 2012 operating margin guidance and 15.5%, to 15.4% to 15.9% of sales.
Diluted earnings per share for the first quarter of $1.14 represents a 37% increase over prior year's adjusted diluted earnings per share of $0.83. As a reminder, the adjusted earnings per share from the first quarter of 2011, excluded the one-time charges from our financing transactions.
Moving to the balance sheet we continue to make great progress in improving the productivity of our net inventory. At the end of the quarter, our inventory turnover, net of payables, was 4 times versus 2.6 of this time last year. While inventory per store is down 5% versus the prior year, the initiatives Greg discussed earlier will mostly offset this reduction, and we continue to expect per store inventory will be relatively flat for the full year. The driver of the net inventory productivity has been our ability to work with our vendors to improve terms for our vendor financing program. At the end of the first quarter, AP to inventory stood at 73%, which was an incredible improvement over the prior year ratio which was 49%.
We continue to see opportunities to enhance our terms and are raising our year-end AP to inventory guidance from the 70% to 75% range to a target of 80%. At the end of the quarter, our adjusted debt to adjusted EBITDAR was 1.68 times, which remains well below our long-term target leverage range of 2 to 2.25 times. While we will incrementally increase our leverage over time, we remain very committed to maintaining our investment grade ratings.
For the first quarter, free cash flow improved 70% to $339 million. This strong improvement was driven by the increased net income, improvement in our net inventory investment, and reduced capital expenditures relating primarily to no acquired store conversions in 2012. Based on our results to-date and the increase in our expected year-end AP to inventory ratio, we are increasing our 2012 full year free cash flow projections $700 million to $750 million.
During the first quarter and through the date of this earnings release, we've repurchased 1.8 million shares with an average price of $87.10. This brings our repurchases to-date to 17.7 million shares with an average price of $64.14.
Our first priority for the use of free cash continues to be to consolidate the industry to accretive acquisitions. To the extent these opportunities are not available, we intend to continue to prudently execute our share repurchase program, with $575 million of cash in the balance sheet, and additional free cash flow generated during the year.
Our guidance for both the second quarter and the full year, takes into account the shares repurchased through yesterday, but does not reflect the impact of any potential future share repurchases. For the second quarter, our diluted earnings per share guidance is $1.13 to $1.17 per share. For the full year, our diluted EPS guidance is $4.47 to $4.57 per share.
At this time, I'd like to ask Shonda, the operator, to return to line and we'll be happy to answer your questions. Shonda?
Operator: Michael Baker, Deutsche Bank.
Michael Baker - Deutsche Bank: So my question, is on the commercial penetration within the CSK stores. I think if I recall at the time of the acquisition, commercial was about 10% in the acquired stores you guys have talked about a goal of gaining 40%. Correct me if I'm wrong, but at the end of last year, I think you were at 30% and so if you could let me know – let us know where you now and relative to the fourth quarter, did the commercial business within the acquired stores accelerate more or less than the total comp acceleration, that's the first question? The second is just a clarification. You said in a couple different ways, I think I got confused, on your pricing this quarter, were you more or less sharp in your pricing in the first quarter versus the fourth quarter?
Thomas G. McFall - EVP of Finance and CFO: To answer the last question first. The description we were trying to give without going into too much detail is that our - in the pricing we referred to is our advertised price, just promotional price and what we've done is we've just taken the position that we're running a little sharper, call the action type of advertised items and running them for shorter period of time. So the exposure to gross margin erosion is probably a little bit less, but we get more activity as a result of those ads, which is the reason that we're running them. On CSK, the mix of commercial business continues to increase a little bit, we'll be about 200 basis points or so ahead of where we were last time we talked to around 32% would be the commercial business number right in that area and then what was your other question Michael?
Michael Baker - Deutsche Bank: Just in terms of your acceleration in your comp to 7% from 3% last quarter, so a nice acceleration, what where did you see the biggest acceleration, was it commercial, was it DIY, was it the acquired stores, was it the core stores?
Thomas G. McFall - EVP of Finance and CFO: We don't get into breaking down the comps between the different types of stores we have, but we saw a good pick up in both the DIY and DIFM side of the business. The CSK commercial continues to be our highest performing comp percentage that grew our business of course.
Operator: Gary Balter, Credit Suisse.
Simeon Gutman - Credit Suisse: It's Simeon for Gary. Can you talk about the slow start you mentioned in Q2? Can you comment on whether you're already within the range that you gave and then do you have a best guess on how the weather impacted the company in the first quarter?
Thomas G. McFall - EVP of Finance and CFO: We really don't have a guess. We know that the weather was a positive, because of the early spring weather. We go like, there was a lot of work done in appearance chemicals and some other maintenance items, that probably wouldn't have been done in March, that would have typically been done in April. As far as the comps, we have a little bit of – this point of the month, we have a little bit of misalignment with our weekends, which significantly impacts our measure of comp store sales. So what I would tell you is, we are right around the range that we gave for our quarterly comps, but that we are comfortable with the comp guidance that we gave of 3% to 5% for the quarter.
Simeon Gutman - Credit Suisse: Okay. Then the follow-up on inventory. Can you talk about what type of inventory you are adding? I mean, presumably you are best in class already, is it categories that you are filling or are you just trying to extend your lead in certain categories?
Thomas G. McFall - EVP of Finance and CFO: Part of it is the expansion of some private label lines that we want to have better coverage on. Today, lines that we duplicate, a branded line with private label, we would have fewer SKUs in private label than what we have in the branded line. We are expanding some of those private label lines. Part of it is just the way we approach the method by which we deploy inventory. We are just seeing an opportunity to improve the science by which we deploy inventory, and we decided to use that in our new stores, and in doing that we decided to roll that out to some of our existing stores. What we are talking about is application parts or hard parts. This would not change the way we manage our display areas.
Simeon Gutman - Credit Suisse: Is there demand for either lower price point or is it higher quality?
Thomas G. McFall - EVP of Finance and CFO: It's a mix. I think, some of the private label products that we sell today are higher quality than they were a few years ago, and there is demand for those products, and because they're priced lower during the recession we saw a good demand for those private label products.
Operator: Kate McShane.
Kate McShane - Citi Investment Research: I wanted to follow-up on the inventory question as well. I wondered, if you were able to quantify any kind of comp lift or margin lift, you are expecting from this initiative, and just more detail on the timing?
Gregory L. Henslee - Co-President and CEO: It wouldn’t be a significant margin lift. I don't know what, Tom, if you've got a comment on that.
Thomas G. McFall - EVP of Finance and CFO: The additional inventory we're talking about is in the area to provide more offering to satisfy more customers, so it would be an opportunity to increase sales, and obviously we look closely at the turns of all our inventory, and we're expecting to get good productivity over – out of this inventory. The timing will be – it's a pretty major change, and initiative and lines will start rolling out here in the next couple weeks, and it will take four, five or six months to complete the process.
Operator: David Silver.
David Silver - JPMorgan: Good morning, guys. The first question I had was on gross margins, just curious you mentioned price optimization in some of the front-run categories in the past, and just curious if you could give us an update on where you are in terms of rolling that out across categories, and then the follow-up just looking at the SG&A per store, clearly a little bit higher than the range in the first quarter. I was just curious if you could kind of dimensionalize how much of that was due to the higher store openings in the first quarter than maybe expected versus some of the higher staffing levels?
Gregory L. Henslee - Co-President and CEO: Well, I'll take the price optimization question, David. We're less than halfway and rolling that through our display area categories. Today our plan is to use this software only on display area categories, but some of the things that this software does we will apply to our backroom lines over time, but we've not begun that process yet, so we're less than halfway with that rollout. I wouldn't expect a material impact on our gross margin from the remainder, but it is – it does give us the ability to better balance our desires to drive demand on certain items with optimizing our gross margin, and that's what we're working on there. On the SG&A per store related to the new store openings, Tom, I don't know if you've a comment on that.
Thomas G. McFall - EVP of Finance and CFO: That is a driver of SG&A being higher on a per store basis. What I would tell you is when we look at our internal plan we're very comfortable with where SG&A came out for the first quarter, and in context of our 1.5% to 2% increase for the year, continue to be comfortable with that. So, from our standpoint we have some difference in timing of expenses and expenses float out as we anticipated in the first quarter with some positives from the weather offset by the higher store payroll we decided to run, and looking forward, we're moving up in our guidance because we anticipate continuing to spend a little bit more on store level payroll. So, the percentage growth year-over-year is higher than our range, but when we look at our plan for the year, it's right within our expectations.
Operator: Greg Melich, ISI Group.
Greg Melich - ISI Group: Two questions. One on the private label penetration, at third that it is today, what was that a year ago, and how much of that is more foreign direct imports as opposed to more traditional private label?
Gregory L. Henslee - Co-President and CEO: A year ago would have been close to 30%, probably just under 30% in that area. It's a mix of application parts, it could be in antifreeze, in motor oil and a lot of different things. Part of our foreign car part strategy is private label and when you say import, I assume you mean for import cars and not just imported product, correct?
Greg Melich - ISI Group: I was actually talking about imported product, but yeah, if can answer on imported cars that'd be great too?
Gregory L. Henslee - Co-President and CEO: Well, the majority of the private label products that we would tell you hard parts would be products that are made outside the country, but a big portion of our strategy today is to improve coverage for imported cars and some of that coverage is being added to our private-label lines and line in product brands that we own and we'll continue to do that. Much of the product is directly imported by us.
Greg Melich - ISI Group: Second on weather, you mentioned how it did help, if you look at history where you've had that sort of a really mild winter, what can you tell us in terms of categories or percentage of sales and their impact if you're looking at history, not necessarily pull forward, but just the fact that some parts may not fail as much like batteries or hoses if they never got as brittle over the winter?
Gregory L. Henslee - Co-President and CEO: Well, weather is as I said earlier, it's hard to predict the impact weather has on our business. What I can tell you is that a mild summer has more of an impact on it than a mild winter and the reason I would say that is this, in a really hot summer car batteries bake, that's really what causes the failure, one of the primary things that causes premature failure of car batteries, a lot of times you won't see the symptoms from a battery that's been overheated for a long period of time until the battery is loaded in cold weather, it takes more cranking amps to start a car in cold weather than it does in hot weather. So it would be hard to quantify any difference that we would potentially see, based on us having an odd winter. I would say that it would be minimal. I would say to the effect that we have talked about at this point has just been the pull forward in business that we typically wouldn't have seen – is early in the year, as we saw this year, that we wouldn't expect demand to change much. One thing that you can watch for of course, is if we were to have a very mild summer, not a hot summer that affects temperature control parts, air conditioners, things like that, and some of the cooling system parts, so that can have an effect. But providing, we have a hot summer as is predicted, I would expect demand to be good.
Operator: Denise Chai, Bank of America Merrill Lynch.
Denise Chai - Bank of America Merrill Lynch: Wanted to ask about your vendor financing programs. If you could just give us an update in terms of the percent who are fully or partially on that at this point?
Thomas G. McFall - EVP of Finance and CFO: Well we have about 45% of our vendors signed up for the program. That's when we look at the total population it. We still have opportunities with a few of our larger vendors, where we think there is a cost savings opportunity, a win-win situation. Some of the vendors that are not candidates, a good example would be, oil manufacturers are not a great candidate to be on that program, based on the size of the companies. Of the of the total population, we have signed up the 40% or 45%. Their buckets are approximately 75% full, where they are in the cycle program. One thing I'd like to add is, all things being equal, just based on the flow of our business, if we didn't have the impact of vendor financing, when we go into the fourth quarter, and business slows down in our industry, our AP to inventory churn slows down, so all things equal the end of the first quarter would be a higher percentage than the end of the fourth quarter, but our expectation is that we will continue to build the percentage even against that seasonal trend due to our vendor financing program continuing to add leverage for us.
Denise Chai - Bank of America Merrill Lynch: Tom, could you maybe just put it in context, you know, like the 45% now, like where was that over the past couple quarters?
Thomas G. McFall - EVP of Finance and CFO: Well, this is a program that we had before we bought CSK, and the finance – the CSK acquisition based on the credit markets, we had to use an asset backed loan facility, and it really took us out of the vendor financing program. So, if we look back to the first quarter of last year, when we went and issued our public bonds and became unsecure, that's really when we launched the program, so this headway has all been made in the last calendar – in the last 12 months.
Denise Chai - Bank of America Merrill Lynch: Just as a follow-up, your advertising program. I know, in the past, you've preferred radio, is that still the case, I know, you made some comments that your national TV campaign was doing well, just how you look at that going forward?
Gregory L. Henslee - Co-President and CEO: I think, at this point, we still prefer radio. Although, we are allocating a pretty significant portion of our budget this year to television advertising, and we also like sponsorships of sporting events – basketball, NASCAR, NHRA, and a variety of other events, but radio would still be a big part of our spend, and we'll just kind of evaluate how TV does this year, this being the first year in a while we've used television, and see what we think of the results and make a decision as to how we proceed next year.
Operator: Alan Rifkin, Barclays Capital.
Alan Rifkin - Barclays Capital: Congratulations on a nice quarter, gentlemen. You mentioned your ability to accelerate new store openings in Q1 due to the favorable weather. Would you be able to quantify how much that added in expenses to the quarter, and would it be reasonable to assume that we will be saving on those expenses in Q2? That's my first question.
Gregory L. Henslee - Co-President and CEO: The answer to that would be, we won't save on those expenses once the stores are open, we're generating those expenses. As the stores open up and their sales pick up, the impact on our SG&A percentage will diminish.
Alan Rifkin - Barclays Capital: Okay, but Tom – but the pre-opening expenses associated with any store that opened in Q1 that was a Q1 expense is that correct to assume and that won't recur in Q2?
Gregory L. Henslee - Co-President and CEO: That portion is true. The bigger driver is when the stores are operating. What's their percent of payroll? Their sales are just building, but the expenses for the store are relatively fixed.
Alan Rifkin - Barclays Capital: Just a point of clarification, if I may, in response to Michael's question earlier, in your goal to get the CSK commercial proportion up to 40% that's more of a function of just a strength in their DIY business as opposed to a function in your disbelief that you can't get it up to the 50-50 proportion that a legacy store has, is that fair?
Gregory L. Henslee - Co-President and CEO: Yeah. Our objective is to do as much business as we can at the appropriate gross margin, and while we would expect these stores over time to have a market share that would be very similar to the historical O'Reilly stores. The differences in some of these store locations would drive us to have that business mix projection just because some of the stores as we talked over the last couple years are in locations that wouldn't be as conducive to having robust commercial programs. So we're just giving an estimate what we think we get to based on some of the stores being in positions that wouldn't be as conducive to having commercial program that would operate to a degree that many of our historical O'Reilly do.
Alan Rifkin - Barclays Capital: One last question if I may. I mean your ability to increase the AP to inventory ratio in this quarter and particularly was really quite remarkable, you're basically at where your goal was for the end of the year, could you just may be elaborate a little bit on how you were able to in fact – how you were able to get that ratio so quickly, so soon, so much soon?
Gregory L. Henslee - Co-President and CEO: Well, we have great support from a great vendor base our suppliers are working hand-in-hand with us to grow our business and we have a very good factoring program, refinancing program that some are participating in and we just have been very pleased with the vendor cooperation that we've had in establishing improved terms, many with use of our financing program.
Operator: Scot Ciccarelli, RBC Capital Markets.
Scot Ciccarelli - RBC Capital Markets: Can you guys help me understand something, maybe I'm just a little confused about what I think of a somewhat conflicting comments here. You talked about slower, I thought it was slower sales growth or lower miles driven on the West Coast as a reason for a slow start, I am assuming that impacted sales on the West Coast or your acquired markets and yet CSK commercial is still the fastest growing segment in the country. Clearly, I misheard something, can you help clarify those two different comments?
Gregory L. Henslee - Co-President and CEO: Scott, what we were talking about is just – we were defining how the CSK acquired stores had performed, and they did very well, they ended the quarter on the DIY side, and we would generally reflect that side as being more impacted by miles driven, because I don't think we are taking as much share on the DIY side, as we are in the Do-It-For-Me side. The Do-It-For-Me side being also impacted by miles driven. On the Do-It-For-Me, we are taking a significant amount of market share, and we have had very robust growth there. So what we were talking about is just the progression of the quarter, and saying that on the DIY side, that we started out in January, a little bit slower in the CSK stores, and that ramped up as the quarters progressed and miles driven improved, and we have just – good weather results, and things like that. On the Do-It-For-Me side, we had good sales growth throughout, as we continue to take market share out there.
Scot Ciccarelli - RBC Capital Markets: Just one more question regarding the gross margin. You talked about the increase in private label. Did the private label penetration increasing, having kind of noticeable impact on the gross margin performance?
Gregory L. Henslee - Co-President and CEO: It is favorable to gross margin. We don't have a number here with us today, to tell you that the effect of our – the private label change from a year ago, from maybe kind of 29% to a third that it is today, that it would have an impact. Our private label business generally generates a better gross profit percentage than our branded business.
Scot Ciccarelli - RBC Capital Markets: So fair to assume that gross margins could be heading, kind of north from where they are, as private label does continue to increase as a percent of sales?
Gregory L. Henslee - Co-President and CEO: The mitigating factor is, that many of our professional customers prefer the branded products, and that side of the business is growing faster than our DIY side.
Operator: Dan Wewer, Raymond James & Associates, Inc.
Dan Wewer - Raymond James & Associates, Inc.: Tom, the inventory per store declined about 5% year-over-year at the end of the quarter. With the addition of the private label assortment do you anticipate that adding to your inventories per store going forward, or will you be editing some of the branded items out?
Thomas G. McFall - EVP of Finance and CFO: We're going to add net inventory to the stores. The timing of when these rollout is impacting our average per store, but our expectation from the beginning of the year and is the same now is that we will be relatively flat on a per store inventory basis.
Dan Wewer - Raymond James & Associates, Inc.: Can you educate us on how your vendor financed inventory program works with this private label initiative?
Thomas G. McFall - EVP of Finance and CFO: Well, for the private label that's a great opportunity for us with the manufacturer who's manufacturing those parts for us, so we would talk with those vendors, some of which are the same vendors that produce brand name parts. So it's equal opportunity whether it's private label or brand name.
Dan Wewer - Raymond James & Associates, Inc.: You had also noted that the private-label penetration was about 29% a year ago, now it's 33%. I believe AutoZone's around 50% or so, is that the type of threshold that you see O'Reilly reaching some day?
Thomas G. McFall - EVP of Finance and CFO: I don't think so. Some of our main product lines, I won't name all of them, in case any of our suppliers read our transcripts, I want all our suppliers feel secure in our relationship of course, that belts and hoses, filters, chassis parts, many products that we carry were very loyal to the suppliers and the brands that we have in place and our customers are very pleased with those brands. So, we won't go to the extent that AutoZone has in the foreseeable future on private labels, but we will continue to augment our existing private label program with additional coverage and we may possibly change some product lines to a more private label dominant position, whereas today we have more of a branded dominant position.
Dan Wewer - Raymond James & Associates, Inc.: Again just to – the key advantage of the growth in the private brand assortment will be in growing your do-it-yourself market potential, it's not really a commercial opportunity?
Gregory L. Henslee - Co-President and CEO: For most part that's correct and the other advantage of course is that it gives us better control over the coverage that we have. If a certain supplier that we are aligned with doesn't provide coverage for a certain array of vehicles in a market that we're in, that may have an unusual vehicle population. With private label we're able to source those products and put them in our private label and provide coverage for that market, whereas with the branded product where you might not have as much national coverage for the vehicles that might exist in all the niche market, it might not make sense for them to tool up or to carry those products, so it gives us more flexibility.
Operator: Colin McGranahan, Sanford C. Bernstein & Co., Inc.
Colin McGranahan - Sanford C. Bernstein & Co., Inc.: Just a couple of quick questions on ticket and traffic. You said like traffic was relatively flat, and I think that's been the trend for a while. Can you talk a little bit about what you're doing with advertising, the price that you call to action, a little sharper, a little shorter, and how that's impacting the traffic overall, and whether you see any reason to think traffic might get a little bit better?
Thomas G. McFall - EVP of Finance and CFO: Well, we're working to accomplish that. Our strategy is to run ads that would be for items or maintenance processes that a customer would do most frequently, run those at a price that would cause the consumer to come to our store. Hopefully customers that maybe haven't come to our store before and hopefully decide that they like our location or our people and become our customer. So our strategy is to try and drive more traffic and I think we were reasonably successful with doing that in the first quarter, and that we had solid DIY comps as a result and that we'll continue to execute a strategy similar to that as appropriate, and of course by doing this and by having maybe a little sharper price on some of these items, we don't run them for as long a period a time, which allows us to maybe not take as much of a margin hit for customers that were coming into our store to buy products anyway, and then just realize when they are in our store that we have an item at a great price. So we're trying to employ a strategy that we benefit from the traffic, but not the erosion of margin or not take the hit for the erosion of margin for the length of time that we previously ran these time spends.
Colin McGranahan - Sanford C. Bernstein & Co., Inc.: Just obviously the customer acquisition tool, is there any – do you have any data, any sense to how sticky those customers are, I mean are these the bottom feeders that are just shopping price on oil and now the oil change package and maintenance items, were you actually able to successfully term any kind of consistent repeat customers?
Gregory L. Henslee - Co-President and CEO: We hope for the latter, but no some are the former. That's very hard to measure and we're trying to put in place programs that will give us a better method to measure that through customer identification, customer loyalty programs, things that give you a way to ID a DIY customer when they make a transaction at your store and you can kind of measure that better. Today we don't have good measurement of that, at least just good measurement of as we would like, but we are in the process of implementing programs, that would allow us to better measure that.
Colin McGranahan - Sanford C. Bernstein & Co., Inc.: The flipside of that obviously was very nice increase in the ticket -- and clearly about 6% increase in the ticket, ex the leap day, can you give us any sense of how much of that was increased AUR, increased UPT or mix effect?
Gregory L. Henslee - Co-President and CEO: We're definitely seeing some inflation in category, especially oil based and some of the commodities, so that's driving part of it, probably about half is continued shift to more hard parts and less accessories. So about half and half.
Operator: Daniel Hofkin, William Blair.
Daniel Hofkin - William Blair: Just a quick question and I apologize if this was asked earlier. Can you remind us of kind of what the comparison trend is in the balance of the quarter? I seem to recall, that especially in May and the first part of June last year, things slowed down a little bit, before picking back up?
Thomas G. McFall - EVP of Finance and CFO: Actually, month by month, we are pretty consistent throughout the quarter. May took a little bit of a dip, and then June popped back up, but there really is not enough difference to really call out one month as being a much larger month than the others. So we have pretty consistent comparisons through the three months of the second quarter.
Daniel Hofkin - William Blair: It sounds like most of the demand pulled through to the degree that you are able to tell if that happened, it would have been relative to what would have happened in April, is that fair to say?
Thomas G. McFall - EVP of Finance and CFO: That's what we are estimating.
Daniel Hofkin - William Blair: Is there a way to sort of gauge how much you think that might have helped, 1Q?
Thomas G. McFall - EVP of Finance and CFO: It would be a guess at best. We look at our sales by category, and clearly, some of the categories that you would logically think would be categories that could be positively impacted by a mild weather coming out of spring, that you would typically see growth in, and – in spring weather, those categories, did well. So we would expect that there was some pull forward in those categories, but to quantify it would be very difficult.
Daniel Hofkin - William Blair: In the first two months of the quarter. Was weather – in January and February, was weather a net negative or neutral? Clearly it was a positive in March, but just wondering kind of, what your thought is on the weather impact as the quarter progressed.
Gregory L. Henslee - Co-President and CEO: Yeah, I think, in January, it was probably little bit of a negative, and then more of a positive in mid-February to March. January was kind of mild winter weather, but spring wasn’t here yet, so we're kind of the in-between zone, and of course, our business benefits from extremes, although the demand for parts and products always comes around, and if a battery is going to fail, and it doesn't fail or it's on the edge of failing, and we don't have three zero three nights in a row that would cause it to show the symptom that it's failed, it's going to fail in a couple, three months, or something. It's not going to last another year, because it didn't get to zero degrees for three nights in a row. So, sometimes the demand might get deferred because of weather, but I don't think that weather plays a long term role in demand for products in our business.
Daniel Hofkin - William Blair: Right. Right. It was more just a question about within the quarter?
Gregory L. Henslee - Co-President and CEO: Short-term, yes.
Operator: We have reached the end of our Q&A session. We'll turn it back over to the leader.
Gregory L. Henslee - Co-President and CEO: Okay. Well, thanks for everyone's attendance on our call this morning. We were happy to report solid results in our first quarter, and we look forward to reporting good results to you at the end of our second quarter. Thank you very much.
Operator: This concludes today's conference call. You may now disconnect.