Advance Auto Parts Inc AAP
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/23/2013

Operator: Good morning, and thank you for joining us on today's call. I'd like to remind you today that our comments contain forward-looking statements, we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook or estimate, and are subject to risks, uncertainties and assumptions that may cause the results to differ materially, including competitive pressures, demand for the Company's products, the economy in general, consumer debt levels, dependence on foreign suppliers, the weather, business interruptions, and other factors disclosed in the Company's 10-K for fiscal year ended December 29, 2012, on file with the Securities and Exchange Commission. The Company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available.

The reconciliation of any non-GAAP financial measures mentioned on the call with the corresponding GAAP measures are described in our earnings release and our SEC filings, which can be found on our website at For planning purposes, our second quarter 2013 earnings release is scheduled for August 8th before market opens, and our quarterly conference call is scheduled for the morning of Thursday, August 8, 2013. To be notified of the date of future's earnings reports, you can sign up through the Investor Relations section of our website. Finally, a replay of this call will be available on our website for one year.

Now let me turn the call over to Darren Jackson, our Chief Executive Officer. Darren?

Darren Jackson - CEO: Thank you, Joshua. Good morning, everyone. Welcome to our first quarter conference call. To our 54,000 team members, thank you for your hard work and focus on our everyday fundamentals in order to better serve our customers and grow our business. Also I want to take a moment to welcome George Sherman, our new President and congratulate Charles Tyson, on his recent promotion to EVP in charge of Merchandising, Marketing and Supply Chain. Both George and Charles are with me today and will be available to answer questions during the Q&A portion of this call.

Turning to our business, we highlighted during the fourth quarter conference call that our start to the fiscal year would be challenging and demand would continue to be weak for the first quarter. We are not surprised nor are we satisfied with the sales and bottom line results. We continue to experience the temporal impacts to our industry with respect to the unseasonably warm weather in early 2012 that deferred maintenance expenditures and impacted failure rates in vehicles, especially in our cold-weather markets.

We expected tougher sales comparisons and the short-term impacts of consumers both considering and increasing big ticket spending, including new car sales to factor into our results. Yet, we did not fully anticipate certain impacts to our core customer, including the payroll tax increases, the delayed income tax refunds, coupled with a very slow start to the spring selling season. Collectively, these factors contributed to a much softer than anticipated comparable store sales performance, which declined 3.2%.

Our comparable store sales decline was driven by our DIY business and partially offset by a modest gain in our commercial sales. Our decline in transactions was partially offset by an increase in average ticket, which was driven by price optimization and the mix of products sold. The encouraging news is that we expected our sales trends to materially improve in April and they did.

Our best weekly performance during the quarter came in the last two weeks, which ended April 20th. During that period, we saw both transaction and the average ticket growth. The principal driver was a return to a more normal weather patterns in the Northeast and the Great Lakes regions. Specifically, we've seen improvements in our seasonal and maintenance categories as customers began to perform that much needed work on their vehicles that have been deferred much of last year. This is reaffirming that our market remains strong, and consumers still have a willingness to invest in reliable transportation. These positive trends have carried over to the start of our second quarter generating low single-digit comp store sales increases. However, our optimism continues to be tempered in the face of a solid start to the second quarter.

Our last six weeks sales performance have been positive, but somewhat uneven week-to-week hampered in part, due to the sluggish start to the spring selling season. Our seasonal categories like wash and wax, air-conditioning and radiators have been the most erratic. Further, our sales outlook for the balance of 2013 remains guarded on account of a couple of key macro factors.

First, is the increase in the number of people purchasing or contemplating the purchase of a new vehicle. Undoubtedly, this will be good for us in the long-term. However, it will cause short-term volatility in the industry, as customers become more selective in what they invest in maintaining their aging vehicle.

Second, our economy continues to be fragile with declining consumer confidence, high unemployment and financial stress in our core customer, which became more acute with the most recent payroll tax increases that took effect at the start of the year.

The silver lining is that the economy of necessity where consumers will continue to seek value from their local aftermarket garages or perform needed repairs and maintenance themselves. Despite our cautious sales outlook, we remain committed to growing our business and profitability through our consistent focus on service leadership and our superior availability strategies. We intend to stay the course in 2013 on our objective of a Company of one delivering on the fundamentals. The expected outcome is simple, which is to make the day in terms of our customer experience, sales and profitability. Pragmatically, that means delivering on a few key initiatives starting with commercial sales and in-store execution while maximizing the benefits of our investments in availability, delivery speed, e-commerce, diagnostic capabilities and beginning the rollout of our new electronics parts catalog. Collectively this is consistent with our transition from building capabilities to leveraging them to improve our ability to consistently grow our business and accelerate our profitability.

In the first quarter, these efforts are reflected in our improving commercial customer retention and growth rates. Our gross profit rate was essentially flat for the quarter, which was above our expectations. Our SG&A per store was down slightly on a trailing four quarter basis versus the first quarter a year ago. All-in and despite our lower than anticipated sales performance, this allowed our operating income change in the first quarter to be within our previously shared outlook of down mid-to upper single digits decreasing 9.1%. Mike will share more details of our financial performance later in this call.

Now, let me provide an update on our five key priorities, I outlined at the beginning of 2013. First, growing our commercial business through improved levels of delivery speed and reliability and increased customer retention and share of wallet with our national and regional customers, we continue to monitor our ability to deliver fast service safely and accurately and leverage our investments in our online ordering and in sourcing of our commercial credit. Finally, we have begun to investment in sales activation programs to better grow our national and regional customer accounts. As a result of these efforts we saw positive comp store sales gain in our commercial sales, across the board improvements in delivery speed, record B2B and credit penetration, and our mix of business in commercial during the quarter grew to 40.8% versus 37.9% during the first quarter of 2012. Our second priority of improving our local market availability is that we continue to increase the number of hubs in our fleet through the new store openings and the upgrade of existing stores that have that space and are strategically located to operate the hubs. Through our first quarter, we expanded our hub store account to 348, adding 9 hubs during the quarter and 31, since the first quarter of last year.

Additionally, we are seeing progress with our operations at our new Remington DC. As we previously stated, we anticipate ramping up to 400 stores being serviced by Remington this year. Through our first quarter, we had 278 stores receiving shipments from Remington at least once per week with more than half of those stores receiving daily replenishment. The initial results of our stores receiving daily delivery is promising as they are experiencing a mid-single-digit sales lift versus their control stores within the region driven principally by the parts category. However, we are still in the very early stages and need to continue to monitor the results over the next several months to draw any definitive conclusions.

Our third priority is expanding our new store footprint. As you recall, we completed the acquisition of BWP at the beginning of the fiscal year and began our efforts to integrate the 124 stores we acquired to the Advance Auto Parts platform. We've just completed the integration planning of this work and will begin the process of converting and consolidating stores over the next 12 to 15 months. We successfully transitioned the independent stores to GPI and retained the outstanding team members at a very high rate and focused much of our attention on maintaining the great relationships built by the BWP team. We continue to move forward with our more aggressive new store opening plan adding 46 net new Advance stores and 5 net new Autopart International stores during the quarter.

Mike will provide a little more detail on our new store openings during the quarter. We continue to be delighted by the performance of our newer classes of stores with our 2012 class of stores continuing to outperform our expectations and our 2013 class of stores meeting our expectations during the quarter.

Our fourth priority, improving our in-store execution is supported by our new tools to measure personal productivity to help place our best sales people during the hours of the days of the week with the highest amount of traffic. Also, we're working to improve the level of individual effectiveness to maximize every customer engagement.

These efforts are simply tied to improving our schedule effectiveness and increasing our customer order size by providing our customers with the full solution all the time in order for them to get the job done right the first time. We're still progressing towards our goals. However, we continue to improve our results which are reflected in our increase in average ticket size.

Five, and finally, improving our profitability through increasing our efficiency throughout our support areas and our store operating model. Our leaders have been working locally and collectively to identify and deliver efficiencies in our business that will put us on a trajectory to achieve accelerated profitability and reduce the SG&A per store gap versus our industry peers.

Additionally, we have developed long-term incentive programs designed to accelerate both the growth and profitability. Collectively, our Company priorities remain intensely focused on operations to drive results through customer service, enable through outstanding and consistent execution.

In closing, I'd like to share an example of how team members bring services our best part to life. As we have mentioned we have been very excited about our new service model of daily replenishment in our Remington distribution center and have increased the availability of parts that has helped us achieve for our customers in those markets. With any new facility with new team members, it is always important to have someone who is a constant champion of the customer.

For Devin Kurtz, the AGM in Remington, this comes naturally. No matter the question or special request to help serve our store customers he always has the same positive purposeful approach of doing whatever he needs to do, to provide that help, to provide that service and to get the job done. He provides a constant focus of quality and integrity with the team members in the facility with a clam continual reminder of the importance of providing great service out to the stores and our customers. Thank you, Devin for being a leader in Remington and for the Company.

Now, I'd like to turn the call over to Mike Norona our Chief Financial Officer.

Mike Norona - EVP and CFO: Thanks, Darren and good morning, everyone. I'd like to start by thanking all of our talented team members for their continued efforts to improve our business and serve our customers as we navigated through a challenging first quarter and start to our year. I plan to cover the following topics with you this morning.

One, provide some financial highlights for our first quarter of 2013; two, put our first quarter results into context with our expectations and key financial dimensions we use to measure our performance; and three, provide some insights on the remainder of 2013. As we shared on our fourth quarter earnings call, we anticipated our first quarter would be challenging given the industry softness carried over from 2012, tougher sales comparisons, the annualization of 2012 new stores along with a heavy concentration of stores opened in the fourth quarter of 2012 and higher incentive compensation.

That was further magnified with the first 90 days being even more challenging than we anticipated, especially in DIY, driven by higher payroll taxes, delayed tax refunds and slow start to spring.

While we are never satisfied when we do not meet our expectations, we were pleased with our discipline to make adjustments during the quarter as we responded to a softer sales environment. These adjustments, along with the stronger sales in the last two weeks of our first quarter, allowed us to deliver a somewhat better bottom-line performance than we anticipated and shared out at beginning of April. As I mentioned to you last quarter, we continue to remain focused on influencing the things that are in our direct control and positioning our Company for long-term growth and profitability by maintaining our strategic focus, executing on the fundamentals and simplifying our operations.

As a result of the weaker consumer demand, our comp store sales decreased 3.2%. Our total sales, however, increased 3% to over $2 billion, driven by the acquisition of BWP and the net addition of 163 new stores over the past 12 months. Our comp store sales decrease was driven by declines in our DIY sales, partially offset by a positive growth in commercial sales. Our gross profit rate in the first quarter was 50% versus 50.1% in the first quarter of 2012 or a decrease of 8 basis points. This was slightly above our expectations for the quarter.

The decrease was primarily due to the planned increase in supply chain cost associated with the full operation of our new Remington DC and the impact of BWP sales which have a lower gross margin rate due to their higher mix of commercial sales partially offset by continued improvements in our shrink rate. Our SG&A rate of 39.9% increased 127 basis points versus the first quarter of 2012 primarily due to expense deleverage as a result of our 3.2% comp store sales decline and increased new store openings, partially offset by lower advertising expense, due to our investments related to the softer industry sales environment and a decrease in credit card fees as a result of the in-sourcing of our commercial credit program.

All-in our operating income was $204.1 million, which was a decrease of 9.1% versus the first quarter of 2012. This was in line with our outlook we shared during our fourth quarter conference call due to our stronger finish during the last two weeks of our first quarter and our teams disciplined focus on expense management. Our operating income rate decreased 135 basis points to 10.1% in the first quarter.

Our EPS decreased 7.8% versus Q1 last year to $1.65 per share and includes $0.01 of transition costs, associated with the integration of BWP. We still anticipated the transition BWP will occur over an 18 month period and the costs associated with 2013 to be in the range of $0.15 to $0.20. Our free cash flow usage of $105.9 million for the quarter was primarily the result of the acquisition of BWP. Excluding the net impact of the acquisition our free cash flow would have been $72 million compared to $153.1 million in the first quarter of 2012.

Our owned inventory decreased 12.8% versus Q1 2012, primarily due to our efforts to increase our accounts payable to inventory ratio which is now at 86.7% versus 82.5% in the first quarter of 2012. Out total inventory increased 15% driven by our new Remington DC, more hubs, more new stores and the acquisition of BWP. This increase was slightly higher than our expectations due to our lower than anticipated sales performance.

During the quarter, we repurchased approximately 767,000 shares at an average price of $76.72. At the end of our quarter, we had roughly $434 million left under our share repurchase authorization and our average diluted share count was 73.8 million shares. At the end of our first quarter we had roughly $605 million of debt on our balance sheet and our adjusted debt to EBITDA was 2.2 times, which is below our previously stated ceiling of 2.5 times.

We continue to measure the performance of our business through the financial dimensions of growth, profit and value creation. We continue to prioritize growth as our primary use of capital in order to increase returns and drive shareholder value. As a result, our focus continues to be on accelerating our commercial growth and stabilizing our DIY business. Our goal to achieve this is by improving our availability through our hub stores, inventory upgrades, supply chain investments and strengthening our market position with increased new store openings. We are very proud of our improved coverage and in in-market availability driven by the areas Darren covered.

We're also proud of the accelerated pace of our new store openings, including the net addition of 175 new stores during the quarter, including the acquisition of BWP, which added 124 commercially oriented new stores in the Northeast, the opening of 49 new Advance Auto Parts stores and the opening of seven new Autopart International stores. Additionally, we closed three Advance stores and two Autopart International stores. At the end of Q1, our total store count was 3,969 and we remain on pace to open 170 to 190 new Advance Auto Parts stores and Autopart International stores this year.

Turning to profit, while we did not meet our profit expectations for the quarter, we are pleased by how our team responded in the face of a slower sales environment to make adjustments that helped our profits. As we shared recently, we have recommitted ourselves to getting to 12% operating margins over the next three years. The pathway to 12% is going to be modest gross profit rate improvement and a significant improvement in our cost efficiency and execution. We have aligned our leadership and incentive programs around this goal. Three big drivers around our cost will be improvements in our labor productivity, developing a more flexible cost model that flexes with sales and reducing administrative and support costs furthest away from the customer.

For example, we have developed tools that allow us to set goals and measure individual team member productivity and we expect to see improvements in our dollars per transaction. We also have a high fixed cost model that needs to scale better as sales flex.

Finally, we have to get more efficient with our costs, including lowering our cost furthest away from the customer. We have made significant investments in our business and capabilities in the last five years and those investments came with the expectations of lower support costs, supply chain, professional services, occupancy costs to name a few. As a result of the commitment to build a more competitive cost structure, while funding strategic investments and to employ a more disciplined approach to cost management, our total SG&A dollars per store decreased slightly to $651,000 per store in our first quarter versus $656,000 per store during the first quarter of 2012.

With respect to value creation, we have maintained our disciplined approach to capital, which is reflected in our return on invested capital of 18.1%. For the quarter, our ROIC decreased 223 basis points versus the first quarter last year, as a result of our increased invested capital through the acquisition of BWP, the insourcing of our commercial credit and the accelerated pace of our new store openings. Also impacting our ROIC is our lower operating performance, driven by the lower sales environment. Longer term, we see opportunities to improve our ROIC as we begin to generate benefits from our Remington DC, our acquisition of BWP and our sales from our new store openings begin to ramp. We also see opportunities to reduce our net owned inventory as we move towards our goal of achieving an AP ratio of 100%.

Turning to the balance of the year, we continue to be confident that the fundamentals of our industry remains strong and are encouraged by our positive comp store sales performance so far in Q2 driven by our improved performance in the Northeast. Our optimism is somewhat tempered by our soft first quarter which is our longest and historically strongest quarter and slow start to spring.

It is unclear how much of our strong start to Q2 is the result of a bounce back from the delayed spring versus a fundamental rebound in consumer demand. Therefore, we think it's prudent to temper our full year expectations. We now anticipate that our comp store sales will be flat to slightly positive for the full year and we will continue to make the appropriate adjustments to our cost in a disciplined way to adjust to these sales trends.

It is still early enough in the year that we are maintaining our annual outlook, but given the softness in Q1 and slow start to spring, we now expect we will be at the lower end of our previously shared annual outlook of $5.30 to $5.45.

In closing, we are committed to our strategies in commercial and availability and remain confident in the industry fundamentals and how we're positioned as a Company. We're focused on improving our top and bottom line and strengthening our returns to continue to drive shareholder value.

We also want to thank our 54,000 team members who lead us every day with their relentless focus on service and commitment to operational excellence and execution, which are key ingredients to delivering on our goals.

Operator, we are now ready for questions.

Transcript Call Date 05/23/2013

Operator: Matthew Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: Two quick ones. Both related to the outlook. On your last call I believe you had given some directional color for gross margin and for growth in SG&A per store on the year. As you maintained your guidance in essence for the first quarter, it was a bit off more originally thought, is there any change to the geography of the P&L considered in your outlook?

Mike Norona - EVP and CFO: First of all what we said in our outlook is that our margin would be modestly up for the year and we still expect our margin – our gross profit margin to be modestly up for the year. Then from an SG&A per store perspective, we said that we expected it to be up 3% to 5% for the year and I would expect now since we somewhat tempered our annual outlook to the low end, we guided to the low end that we would be in the low end of that SG&A per store.

Matthew Fassler - Goldman Sachs: Then secondly, welcome back to the world of share repurchases, it's been a while and it is good to see you buying back stock. It was kind of dipping the toe end backend relative to the rate that we have been accustomed to when you were most active, what's your thought process on the kind of money you would look to put back in through buybacks given that your free cash flow remains substantial?

Mike Norona - EVP and CFO: So, first of all, I just want to remind everyone we haven't changed our view on how we deploy capital. We take a long-term disciplined approach to our capital and we prioritize investing in the business first and then looking for nonorganic strategic investments in areas that are strategically alignment with our Company, i.e., the BWP acquisition. So that hasn't changed. We also see buybacks as kind of that third leg to return back to the shareholders, but our priority is always to give back, to invest in the business first. You saw that we bought back about $59 million of shares in the quarter, in terms dollars and we typically, we don't give a forward outlook in terms of how many shares we buy back but, our capital allocation hasn't changed and as you saw, last time, we said we were going to start buying shares back and you saw us do that in the quarter.

Matthew Fassler - Goldman Sachs: Just very quickly, a cleanup, if you think about the guidance you initially issued, I'm not sure that there's any buyback in there, you've since bought back from stock, so should we assume that the implied share count is in line with no incremental buybacks but the buybacks that we've seen year-to-date?

Mike Norona - EVP and CFO: Yes, that's right. So, we won't include any – no future buyback is included in our outlook, but we have incorporated what we've purchased to-date in our outlook.

Operator: Michael Lasser, UBS.

Michael Lasser - UBS: I want to talk about the pace of improvement that you saw towards the end of the first quarter and it sounds like it continued into the first period. It sounds like you've been kind of guarded on your optimism that – about the acceleration and may not have been to the same degree that some of the other players within the industry have talked. So, is that fair and is there an explanation for that?

Darren Jackson - CEO: Yeah, sure Michael. This is Darren. So, a couple of things, you're absolutely right. Our comments do reflect that we are guarded. When we look back at the first 16 weeks of the quarter, it's our longest quarter over the year, as I said in my comments, our last two weeks were as we expected materially improved in terms of our sales trend, but before that it was pretty uneven. Matter of fact, I'd say we started in period one very strong, the middle part of the quarter was very challenging, particularly March and we expected part of that and particularly in our colder weather markets because of the early spring that affected us and many others in the industry and related industries. So, we got into Q2 as I said in my remarks, if we look over this, the first four weeks we've been absolutely positive in the low-single digits as I said in my remarks. I'm a little guarded because I'm not sure if it's a head-fake a little bit in terms of the consumer. So, when I look through the trends we certainly can see take our maintenance categories, we've had an enormous bounce back in our maintenance categories, maintenance is about 45% of our business, so it tends to skew higher than say some of the others in the industry. So that maintenance category has just been stubborn and erratic for the better part of the year, so that's going to include your oil, that's going to include brakes. So, I guess it's just prudent on our part to temper those expectations till we get more then call it a six-week trend at this point. Now having said that internally, you can imagine we are planning to higher expectations, but we think responsibly we should manage both of our topline expectations, manage our costs in the right way to get to the right profitability outcomes at the end of the year.

Michael Lasser - UBS: That's very helpful commentary. The follow-up question, Darren, in your prepared remarks you called out rising new car sales and the intention of consumers to buy new cars. In the past industry has kind of had an uneven or inconsistent relationship with new car sales, there's been periods where the industry has done really well in in a pretty high star environment and then obviously, when the SAAR fell the industry also did quite well. So what's driving that viewpoint right now and maybe you could talk a little bit about your decision to include that in this?

Darren Jackson - CEO: Yes, happy to do that. Let's say, more broadly when we look into consumers, the one thing in our category we do see is failure has been a consistent performer for us and failure categories again, think about batteries is probably the anchor in the failure category business. So we know when something actually breaks the consumer does spend and that's been a consistent performer as well. When we get into the maintenance categories and how it ties to new car sales is that, not just the cars that are being sold, it's the cars that are contemplating – consumers contemplating a new purchase. The other thing I would say is that, when our industry really benefited in '09 and '10, what we saw was that release in terms of the deferred maintenance spend. It came at the cost of probably some adjacent industries to us. So we saw housing slowdown in terms of the spend in housing. We saw home improvements slowdown at that moment of time. I think sometimes we nearly just think about our industry versus that consumer has a wallet and those dollars tend to go different places. Clearly they are choosing to use part of that wallet in some adjacent categories today. The contemplation of a new car will actually make them more selective in terms of what they invest, in terms of their aging vehicle and then candidly there is just more cars being spent. So I think a lot of times there are industry-specific things that we must pay attention to in seasonal cycles and we have to be realistic. Ultimately it comes down to a consumer's wallet and how much open to buy they do have and so my comments really reflect that guarded, but I think pragmatic view about what the consumers face.

Operator: Michael Montani, ISI Group.

Michael Montani - ISI Group: The first one I had is related to the comp cadence that you might be up against, if you think about the second quarter of a year ago, and I guess, specifically the thought would be, if you're positive low single-digit now and we look at the negative 27 comp you did in 2Q '12, was that negative 27 sort of evenly negative low single-digits that just start better in April and then maybe tail off towards the back half? I guess selfishly it could imply that the comp could be something better than just one or two for the quarter.

Mike Norona - EVP and CFO: Well Michael, we certainly hope so, and I think it goes back to my earlier comments as I – I don't have the period by period in front of me from Q2 a year ago, but my sense is there was just a consistency to it. I don't think it varied anymore from a point or two, period to period. So, that's not necessarily how we're looking at the comparison in the second quarter. It really comes back to – we want to see more consistent stability in that positive comp sales trend. The good news is we're seeing positive comps week in and week out now. We have some big weeks still ahead of us as we head towards just this weekend ahead of us in terms of Memorial Day, as you head towards July 4th a little later in this year, but the good news is we do see on a two year basis, our stacks remain positive as well. So, all that's good and I'd just take you back to my prior comments and we think it's important just to kind of temper some of the expectations, but clearly focus our teams towards a higher outcome.

Michael Montani - ISI Group: Then, another question, sort of bigger picture, was just looking at call it a 600, 700 bps deceleration in comps from 1Q '12, for yourselves and the industry broadly, we've been thinking obviously weather is a couple hundred bps in disinflation. Can just provide an update may be on what kind of inflation you might be having today in your numbers at retail sort of 1% to 2% perhaps and what it could have been a year ago and basically the root of this is to understand have you now sort of cycled out of a period where there maybe was some inflation and now it's kind of stabilizing or what are you guys seeing?

Charles Tyson - EVP, Merchandising, Marketing and Supply Chain: Yeah, Michael, we're still expecting a very modest impact from an inflation standpoint. It was more aggressive last year than we expect to see this year. I think you're going to see some volatility through the balance of the year, through the chemical business, primarily driven by what expectations drive-through oil. I think in the balance of the business we're going to see a good level of stability in our pricing. Obviously if we see a change as we've done in prior years, we'll react to that pricing to be competitive with the market, but I think it will be very modest as we're seeing through the balance of the year.

Darren Jackson - CEO: Yeah, Charles, you'd probably say, we're going to have pockets of lower price points particularly in the AC category year-over-year. So, we always have those pockets, Michael. Air-conditioning being the one where the commodities tend to be somewhat volatile. I think as we look out AC is another one where pricing is such and cost of commodities will take ASPs down this year. But we'll have other places in the hard parts categories, partly because of complexity, partly because of inflation that will offset some of that.

Operator: Christopher Horvers, JPMorgan.

Christopher Horvers - JPMorgan: Your gross margin guidance it was down a little bit here in the first quarter. What changes throughout the year that should allow it to reverse the trend and then how much of that is getting Remington up to speed from a capacity perspective?

Darren Jackson - CEO: Yes. So maybe I'll start and then turn it over Charles. So we were pleased in the first quarter and I think we said in our remarks that we came in above our expectations. Your product margins were good. What really drove the decline in our margins was the investments in our supply chain. So as you know, we have Remington up fully operational now. We have more hubs than we had last year. So our supply chain costs were that and that was somewhat offset by our progress in shrink and I do want to pay a real compliment, to our retail teams and our support teams that are driving that. We were achieving record level shrinks, so that somewhat offset it. So the 8 basis point decline was driven by that and we mixed in more commercial and that's a little – that can be lost a little bit in the story. Our commercial penetration, our balance of sales or mix of sales was over 40% – 40.8% of our mix, so that was the drivers in Q1. Really what we said for the year is, it's going to be very similar types of drivers. Obviously we are going to continue to invest in our supply chain. We have talked about our second DC that we are investing in and then we expect to see continued strength in our product margins, continued benefits in shrink and then the two offsets that will be our supply chain and then we are going to continue to mix in a higher mix of commercial. So it's really, we are going to see the same things throughout the balance of the year. But again we expect that are margins are going to be up modestly and we plan this Q1 to be down and that was part of our outlook as well.

Michael Lasser - UBS: So just the math of that in Remington suggests that it sort of gradually moves to positive and more positive I guess in the back half?

Charles Tyson - EVP, Merchandising, Marketing and Supply Chain: Yes. As you put more stores in Remington you are going to leverage Remington and those cost in Remington. So they start to come down over the course of the year.

Michael Lasser - UBS: Then on the SG&A side any quantification of those drivers, more specifically, and can you point us to on the cost efficiency side, did you see benefits here in the first quarter of the commitment to drive profitability or is that still coming?

Mike Norona - EVP and CFO: Yeah, so maybe I'll hit your first one first. The drivers in the quarter of our cost increase was obviously fixed cost deleverage, because we did a lower comp and new stores. So, we've ramped up our new stores. We're annualizing now a lot of the stores that we opened in the back half of last year. So, those were the two biggest drivers and they were offset by some adjustments we made in our marketing spend as we adjusted the sales and we had favorability in our credit card fees because of the insourcing of credit. So, that's what happened Q1. The drivers for the year are very similar. It's going to be new stores. We do have $0.15 to $0.20 of transition cost for BWP that are built into that number and then higher incentive comp, and that's for the year and that will be somewhat offset by some productivity improvements. We're expecting to see some more effective marketing spend and some lower admin cost. So, that's what I would tell you for the year. In terms of our commitment to get to 12% and the improvements we see there, very little of that was baked into the first quarter.

Michael Lasser - UBS: Then, just a segue in the BWP integration cost, you cited $0.01 in the prepared remarks. You didn't call it out in the actual release. Is that all in the SG&A line item and as those costs become more substantial to get the $0.15 to $0.20 will you actually call that out in the earnings release?

Mike Norona - EVP and CFO: Yeah, we will. We may not call out the specifics, but we will tell you. So, we had $0.01. I think Darren mentioned in his remarks, we're really pleased with the first 90 days and really our first 90 days, we were really focused on three things. One, is the transition of the independents and the Armonk DC to GPI. The second thing we are focused on is building relationships and retaining our team members. We're really excited have those parts – that business as part of our Company and their talents so that was an important dimension. And then the dimension is making sure we're continuing to build and retain the customer relationship. So, that's where our focus was. Primarily those – and then the other thing that we did during the quarter was really we built our – we finished off the integration planning phase, so as they become – as the costs – so that's what really made up the $0.01 in costs. We're just getting started. As the costs become more material throughout the year we'll give you visibility at the highest level but we still expect at this time that the $0.15 to $0.20 to – that's – we still expect that that that will be the range in which they are going to be.

Operator: Michael Baker, Deutsche Bank.

Michael Baker - Deutsche Bank: Wanted to ask you about sort of the comp trends and the improvement that you saw towards the end of the quarter. Can you share with us whether that was – whether you saw outsized gains in those colder weather regions or did you see improvement in trends in both cold weather and the regions that actually have been hanging in okay? Can you also tell us if it was – if you saw the improvement in commercial and DIY or one versus the other? Thanks.

Darren Jackson - CEO: Yes, that's my answer to the question Michael. We did see in the final two weeks in the spring selling season showed up we saw gains across the board. Did the cold weather markets outperform the other markets? They absolutely did and we expected them to do. Did DIY come back and commercial accelerate? Yes, it did in those two weeks and those are things as I said in my comments, we expected to bounce back in April and we expected that bounce back to be principally in colder weather markets. I would have said in the first 90 days across our markets, we underperformed and we underperformed in those seasonal categories of the business for the reasons I talked about before. When the final two weeks came back, came in, they bounced back, that bounce back has continued into the first four weeks of this quarter. So it's an encouraging trend for the reasons we have talked about earlier but that's what we saw in terms of the basic parts of the business.

Michael Baker - Deutsche Bank: Two more quick questions if I could. One, at your Analyst Day you mentioned that Wal-Mart was becoming more competitive in this space, can you update us on what you're seeing there? Then lastly maybe a subtle point but on your new stores, you said 2012 was above plan, 2013 in line with the plan, is it just that what you really – to really get a good read on the 2013 stores or is there some reason why they wouldn't be performing as well as across to 2012?

Charles Tyson - EVP, Merchandising, Marketing and Supply Chain: I think what we said was several years ago we saw how Wal-Mart had made an adjustment into the category. But certainly from a promotional perspective we've not seen any material difference year-on-year on how I would see them impacting promotional pricing in the marketplace or a change in that mix that fundamentally make any change in the marketplace.

Darren Jackson - CEO: As to the new stores you are right. The 2012 class certainly outperformed our expectations last year. They are outperforming our expectations this year. 2013 are at expectations, and I think for the reasons we mentioned, it's too early to tell and I would have said, in light of the slow start to the spring selling season, they are actually outperforming expectations. They continue to do very well as we mix more into commercial in those new stores, and the thing that held them back in the first quarter was more DIYs in their commercial business.

Operator: Dan Wewer, Raymond James.

Dan Wewer - Raymond James: If George is available, I wanted to ask if he could talk about his prior experience and accomplishments and how that could help advance and also what are his initial thoughts in the four, five weeks he's been with the Company.

George Sherman - President: Let me start with prior experience. I spent the last four years with Best Buy on the Services side. Five years roughly with the Home Depot and 15 years with Target, and I think probably the keyword out of those experiences is operations. A lot of time as a – virtually every store role from General Manager through Regional Vice President, through Senior Vice President of stores, operations with the Home Depot. So I think, if you look at things like beginning to accelerate operating income, that's going to require a fair amount of execution. I think – kind this being a field led role for me as President, a lot of time in the stores, a lot of time in distribution centers, a lot time away from the support center and that's been the case up until now. It's been 30 days, almost exactly, and those 30 days have been in market time in stores in Atlanta and in Virginia, Washington, D.C., Chicago. Had a chance to go see the hub strategy play out. In conjunction with daily delivery with some of the markets that are affected by the Remington daily delivery, out to see the e-commerce team on the West Coast in San Jose. So very initial, but I think the observation so far are that there are certainly from my standpoint calls up for optimism I think where daily delivery and hub strategy meets we're seeing as Darren mentioned some nice mid-single digit lift relative to the control stores. I think we had a chance to talk to some of our commercial customers. We're seeing from a customer service standpoint, reliability, more consistent in-stock level and a plan that's clearly working. I'd add that and this is always a benefit as you know. Anytime you have the chance to simplify the operations in stores and retail that's a very good thing. The stores with daily delivery are easier to run. There is less of an event around trailer unloading and truck arrivals when it's not one large or two large weekly shipments, but something smaller coming in daily that becomes part of the daily routine as opposed to a labor event in the stores, so we're able to redirect focus more towards customer service and doing well by our customer. So, I think that's in a nutshell, it is to be an operationally focused leader for this business and to be out there quite a bit with our store teams, our distribution teams in the field and with our customers.

Dan Wewer - Raymond James: During the 30 days you've been with the Company and the kind of work in the field, do you see any potential easy wins, any low hanging fruit and improving execution?

George Sherman - President: Yes. I think we're clearly moving towards operational plans now. As Mike and Darren talk about a goal toward – getting toward 12% op income that requires planning, I think we're finessing that at the moment and making some changes to it. I don't know that there are, what I would call low hanging fruit, but there are certainly things that we'll begin to address and make improvement of.

Operator: Scott Ciccarelli, RBC Capital Markets.

Scott Ciccarelli - RBC Capital Markets: I think as a little bit of a follow-up from the answer we just got, but you have mentioned twice now you are seeing the mid-single digit comp lift for the stores receiving the daily delivery. I guess my question is, can you address the profitability of those sales, in other words, are the extra sales being justified by extra costs incurred on the daily delivery? Then related to that, how are you going to think about kind of that balance going forward?

Darren Jackson - CEO: Yes. I would bring you back to, we are exceeding the pro formas that we built. When you build a distribution center there is three pieces; one, as we talk about Remington, Remington enabled a few things. One, it enabled growth and the new store growth we are seeing in the upper Midwest, principally in our Chicago markets, so in part that distribution center was positioned eight years ago, we just finished before I got here to position us for growth. So certainly that DC is paying for itself in part through the growth we are seeing in those key markets. Two, the daily replenishment, as George highlighted in his comments and in my comments, we are actually exceeding the pro forma that we built and that's a double delta. So we are simply comparing to a control store group and we are exceeding those expectations. Are we blown on the way, we are not blown along the way, but I am encouraged that we are – we are probably first full quarter. We are not even fully operational in terms of all the stores that we will serve out of that DC and this is the sixth DC I have opened in my career. Generally it takes the better part of the year to work the bugs out because it's still a new facility, a new set of technology, a new set of processes (indiscernible). So I am pleasantly surprised that we are reporting what we are reporting right now in light of that level of change going into that facility. Then lastly it comes down to the cost of running the building. If you remember part of how we are paying for it is that, that sales lift has to pay for the incremental transportation and it's certainly paying for it, but the other thing that it just takes time to measure, it will get measured in customer retention on the commercial customer side. So, that longer term commercial customer retention, if we think about that in terms of – I don't know, lifetime value customers, there's a big benefit to that, that quite frankly, we're not going to know the answer to that for probably another year, but what we can see so far in customer behavior in terms of our bigger accounts, we like what we see. So, I'm very encouraged that we're this early in the journey, both in terms of enabling growth, seeing the lift in a way that certainly pays for the transportation. We're still working through the cost side of the technology and the people. More importantly the longer-term benefit is in the commercial customer retention, and availability for the DIY customer when they come in and the longer term profitability that comes from that.

Mike Norona - EVP and CFO: I think what we want you to hear, is we're optimistic. It's still early. We're seeing lifts on both sides of the business. Also, as we mix in more parts, we're expecting that will be accretive to our margins as well and then we're expecting down the road to see labor productivity. These are automated DCs and like I said, it's still early.

Operator: Bret Jordan, BB&T Capital Markets.

Bret Jordan - BB&T Capital Markets: On the same theme, given the success you've seen in daily delivery, is there any thought about accelerating the Connecticut distribution center that's sort of next in the pipeline or I guess, when would we expect to see that opening up?

Darren Jackson - CEO: We have our plans in place in terms of the investments we have to make around building that facility. We are on target for third quarter plan for 2014. It's pretty complicated, so yes we would always love to want to accelerate, but we want to stick to our plan and do it the right way to make sure that we execute the opening and fulfill the needs for those stores. So, the teams are focused on it. They are taking their learnings from Remington. They are doing some parallel (talking) through Remington into Connecticut. So, we expect to open in the expected timeframe that we announced before.

Bret Jordan - BB&T Capital Markets: Then one question on the commercial given the national account sales focus. Could you tell us of the 40% that's commercial in the mix, what would you consider sort of national account versus up and down the street business and maybe compare the growth rates given the accelerated focus on national accounts and maybe lumpy, but clearly some bigger wins when you get them?

Darren Jackson - CEO: Usually what I do is in part, we're not going to go into all of those details in terms of how we're focusing our national account strategy, but I'll say this is that over the first quarter what we did see is our national account business led the way. I mean we saw business in terms of national accounts that was closer to higher-single digit comps, than the overall comps for the business. So, as you recall, I mean you've been following us for a while. We started to build the business I would say principally through the mom-and-pop business up and down the street. We've made good headway in terms of the regional accounts. Our national account penetration is rolling. I'm very pleased in terms of how the team performed in the first quarter. As I said in my comments, our focused customer retention this quarter, we exceeded our plans and our expectations for the quarter. So, all in all I think we continue to walk that journey in terms of Advance growing its business with the right accounts and focusing our attention in terms of the service levels.

Operator: Peter Keith, Piper Jaffray.

Peter Keith - Piper Jaffray: On the commercial credit program as you called it out as the actual benefit to SG&A. I don’t recall seeing that before. Is there some aspect to that, that's now beginning to grow more quickly, or is that just other pieces of the business outside of it are changing in terms of how everything flows through the income statement?

Mike Norona - EVP and CFO: So maybe just specifically how it flows through the P&L prior to us in sourcing it. We used to pay, let's call them the credit card fees to HSBC who used to run our program. When we in sourced it we now have people doing that and systems doing that. When you net all that together we are seeing benefits on the credit card discount line. So that, when we talk about benefits to SG&A, that's specifically what we are talking about. In terms of the program, I mean there is three primary benefits on that. One is, we expect this to be a key enabler to grow our commercial business. Our team members have an opportunity now to have customers and whether its control limits and the approvals and things like that. So we think we can drive our commercial business, so that's the first benefit. The second benefit is, we just give a better service level when we handle things internally. So now all the touch points with our customers are done with us. So whether it's through a store, through a sales associate, through our SSC or through our call centers we are doing all that, so that we can give better service levels to the customers. Then the third one is the one you hit is, we expect that this credit program will also help our costs as well through lower credit card discounts.

Peter Keith - Piper Jaffray: Is it now that you say you have had it in-house for a couple of quarters, is it now beginning to accelerate for you?

Mike Norona - EVP and CFO: Yes. So maybe I will talk about the penetration. I think we have talked before that the leaders in the industry are over 80% credit penetration and we were in the low 40s when we started this. We are slowly making our way. Now we are in the high 40s. We will probably get to 60 before we get to 80, but I think we're working collaboratively across our organization. We're building the muscle across with our commercial sales teams, our retail field teams and our credit group to actually build a program that we can go to the customer. So, we're early on. We think it's going to happen over a matter of years, but it's going to be a really important key enabler to helping our commercial growth, but it will be over years.

Operator: Craig Kennison, Robert W. Baird.

Craig Kennison - Robert W. Baird: With the success you're seeing at Remington so far, it's exciting on the comp side. What do you see in terms of the cost required to build future DCs? Do you see an opportunity in other words to reduce the expenditure required to advance that strategy?

Darren Jackson - CEO: Yeah, Craig, we certainly do. So, Remington's going to be the most expensive facility that we built, and I say that because it both reflects our new WMS system, it reflects the work force that was brand new in terms of just teaching them the distribution processes for the Company and naturally it's going to experience all the bumps in terms of process and learnings of all the DCs, and field will be cheaper. Because we'll be able to take the footprint and avoid some of the natural startup challenges one has in a new DC. I think the material cost savings that we'll see is that, we're building the blue prints now to ask the question, given our existing facilities, how quickly can we retrofit them, versus build new. We don't have a complete answer for that now. The teams are working on that as we speak, but to the extent we retrofit them, the good news is we can materially get the CapEx costs down which again Bob is some of the ongoing SG&A or labor efficiencies because you won't be able to essentially get the same level of technology in. But the teams are evaluating that. Now we're optimistic to wind up with both the build profile and the retrofit profile. So, as we grow our business west of the Mississippi, we certainly have a footprint that we see in terms of Remington and east of the Mississippi we're looking for a solution in terms of retrofit.

Craig Kennison - Robert W. Baird: With respect to housekeeping here, how many commercial programs did you end the quarter with?

Darren Jackson - CEO: 3,300, right, Joshua.

Joshua Moore - Director, Finance & IR: 3,316, yeah.

Darren Jackson - CEO: 3,316, if you're keeping score.

Operator: That's all the time we have for questions. I will now turn the call back to management for any final comments.

Joshua Moore - Director, Finance & IR: Thank you, Wendy and thanks to our audience for participating in our first quarter earnings conference call. If you have any additional questions, please call me Joshua Moore at 952-715-5076. Reporters please contact, Shelly Whitaker at 540-561-8452. That concludes our call. Thank you.

Operator: Thank you. That concludes our call today. You may now disconnect. Thank you for joining us.