Mike Norona: We didn''t experience any material adjustments through LIFO for the quarter.
Seth Basham (Credit Suisse): Going forward would you expect any of the strong credit from last quarter to reverse?
Mike Norona: No.
Seth Basham (Credit Suisse): Can you give us a breakdown of where that margin strength is coming from? You mentioned supply chain, you mentioned pricing, but how much of it was really pricing, and how much of it was supply chain, and how did the addition of the new brand come into play there?
Mike Norona: When you look at our margin rate, 66% of it was related to supply chain and logistics efficiency. And the other, the rest of it, was attributable to pricing.
Kevin Freeland: The portion that is attributable to the gross margin or the product margin side, again, the minority was relatively evenly split on a mix rate basis. We benefited from both the parts categories were up in the quarter, predominantly they hold a higher overall rate. In terms of the new brands, it''s too early to tell. We''re transitioning at this point and we''ll have a better sense of that next quarter.
Seth Basham (Credit Suisse): You talked about constrained profit growth for the back half of the year. Are you referring to net income growing marginally from here? How did that factor into the extra week?
Mike Norona: We''re looking at the total picture, so if you think about the top line in the second quarter, we believe there was some impact of stimulus, even though we haven''t been able to quantify it that may have pulled some sales forward from the back half of the year.
Second is, as we look forward, there are some investments we have to make in our business. We refer to them a little bit in e-commerce, our new Minnesota regional office. We see some pressure coming from fuel costs, obviously, and increasing our store closings. And then the third bucket is we continue to make investments in our business in our capabilities and in our four strategies. So that''s where you''re seeing some of the pressure come from.
Seth Basham (Credit Suisse): Does that mean that you''re expecting very minimal net income growth? How does the extra week figure into that?
Kevin Freeland: No, you could look at the first half of the year, and I think Mike put it this way when he explained it in the release. The truth is, we''re ahead of where we thought we would be both in terms of the top line and margin line, expense is about what we thought, maybe a little higher, are things we''re proud of. We''re paying out bonuses, and we''re making some investments to grow the business. I think collectively we''re up 22% principally driven by op income growth and leveraging EPS.
When you look to the back half, I''m trying to sort out just how bumpy this is going to be for the consumer. And we have to keep investing and in terms of the merchandising systems so we can grow the business and into 2009, 2010. We know we have to make the e-commerce investment.
Dan Wewer (Raymond James): On the acceleration in your commercial growth, is that reflecting adding more commercial customers or is it taking your existing customers and getting them to give you a greater number of first calls on parts?
Jim Wade: It''s a combination of both. In the second quarter we saw a similar type of situation as we did in the first, where we saw both our existing customers buying more as well as we''re adding parts and additional availability and taking advantage of the basics of the business, so we''re attracting new customers as well. And our sales force is doing a nice job of telling the story about what we''re doing in commercial, and I think we''ll see our new customer base continue to grow as well.
Anthony Cristello (BB&T Capital Markets): When you look at the improvements sequentially on the DIY, was there any one initiative that you would point to, whether it''s inventory or advertising or pricing, that stood out or perhaps had a better traction than the rest?
Elwyn Murray: Specifically, our traction is strongest around our parts availability. I don''t want the point to be lost that literally 50% of our DIY business is still in parts, so we''re a major beneficiary of these investments that we''re making. I would say the other one that is having the most traction at this point would be our attachment selling initiative where we''re looking to sell the complete solution to our customer. And we''re providing our team with both the business case for doing that, the tools to assist in that, and also the visibility to the metrics to let them know how we''re doing in that area. So, again I like parts availability and attachment selling as probably the top two, with expectations of more to come from both of those.
Our turnover at store level this year is tracking year-over-year down about 35%.
Anthony Cristello (BB&T Capital Markets): From a category standpoint, was there a demand or strength on items that could be perceived as mileage enhancers or was strength generating categories of parts that traditionally would have more deferability in nature to them or can you tell?
Elwyn Murray: We saw some nice improvement in performance chemicals, which is an area of things like fuel additives where people are looking to improve fuel mileage, but also to extend performance and delay ultimate repairs. So we did see improvement in categories related to that.
Anthony Cristello (BB&T Capital Markets): You’ve added a lot of parts, particularly behind the counter, and maybe you''ve changed some things in the front of the store, when you look at the allocation of what''s selling square footage might be at the front of the store versus what''s behind the counter now, how has that changed over the course of the last year as you restructured stores a bit?
Kevin Freeland: The allocation between the front and back rooms has remained relatively consistent. Our sales increases are inordinately coming from behind the counter, but that has to do with being led by the improved availability behind the counter and the increase in the commercial business. As we go forward on the DIY side, I think it''s reasonable to expect a comparable turnaround in the front room.
Christopher Horvers (JPMorgan): As you think about guidance and what you''re saying for the back half of the year, clearly some SG&A pressure is coming in. Is there an element that the gross margin opportunity may be in the pricing and the logistic cost savings is coming down and how much of that delta is driven by fuel costs versus spend?
Mike Norona: At the beginning of the year, we gave an annual outlook. We''re not going to give quarterly guidance. But what we have said is now we''re going to leverage on the 2%, our SG&A versus a 1%. And I want to put that in context to the sensitivity grid I gave you at the beginning of the year. As a result of the change of going from 1% to 2% on the SG&A leverage, our best estimate is that a 1% comp improvement now is about $0.06 EPS and a 10 basis point improvement in operating margin is going to be $0.03 EPS. And then just some more context on the supply chain, we will be annualizing in the fall some of the supply chain efficiencies that you''ve been seeing that have been showing up in our numbers.
Kevin Freeland: Two-thirds of the pick-up was on the supply chain side, and we will anniversary much of that in the fall. It was also partially driven by the $40 million increase in inventory that sales were up 5.6% and inventory was up 8.1%. That increase in inventory essentially improves the efficiency of running the distribution centers. It''s reasonable that we will continue to make inventory investments through the fall, but again, that was certainly a subset of the overall impact that we saw in the second quarter.
In terms of the product margins on the goods, the smaller portion of this, I think it''s reasonable to expect that the inflationary impact that those numbers are sustainable. Longer term on both fronts, though, we have a pretty material investment at this point going into new systems and new capabilities. I think as years go by it would be reasonable to expect that we can lever on our supply chain costs and improve the sharpness and accuracy of our pricing.
Matthew Fassler (Goldman Sachs): First of all on the SG&A side, I think you gave these numbers at the EPS level a moment ago. The change that you''re talking about in terms of the comp you''ll need to lever, it sounds like that would suggest, call it 2 or 2.5 percentage points of incremental growth in SG&A dollars over prior plan, is that basically the way to look at it?
Mike Norona: What we''ve said is that originally we were expecting to leverage SG&A to 1% comp, now we''re saying 2%. The primary three drivers around that, and we''ve given the reasons. Professional services to invest in capabilities, fuel, and then some of the other spending that we''re doing. So, that''s how we''re thinking about it. We don''t break out the details of the basis points.
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