Darren Jackson: We''re still running the business trying to figure out if we can spend about $600,000 $601 and trailing 12-monts. We continue to remain vigilant with the balance in commercial investments and merchandising systems and taking costs out of these.
Matthew Fassler (Goldman Sachs): Related to the SG&A line, how much of what you''re talking about on a year on year basis is a function of the fact that a year ago the company started making some significant cost cuts. Is it more a question of cycling those cost cuts or more of a question of the incremental dollars?
Darren Jackson: Last year, we actually made moves to take $70 million out of the business in terms of costs. $20 million showed up last year. $35 million of that was annualized this year, and then $20 million of that were new initiatives that we did this year. Those have been planned this year and we are achieving those.
Matthew Fassler (Goldman Sachs): It sounds like pricing is leading to actual gross margin rate improvement. So, presumably to the extent there''s any increase in product costs due to raw materials. How do you see that balance playing out over the course of the year? Do you feel like product inflation, cost inflation is at run rate that you can more than manage on the pricing front, or do you feel like that''s an issue that might still be on the comp?
Elwyn Murray: I would agree with your assessment. We obviously monitor what we call price indices for both our sales floor as well as our parts department and feel good about our positioning there. Many of the cost increases that we have incurred we have been able to pass along, as has the market. I wouldn''t anticipate any downward pressure from this cost increase given the ability to pass those through. But we do want to make sure that we remain competitive as we consider each increase.
Scot Ciccarelli (RBC Capital Markets): Can you talk about increasing the threshold on SG&A to a 2% comp where you show leverage? Yet we just saw almost a 3% comp and we de-levered by several basis points. Was there already an acceleration of investment spending or was there something else in there?
Judd Nystrom: We were looking at it on an annual basis and not on a quarterly basis. Part of our driver in the second quarter is actually an increase in incentive compensation. That was a component as well as rising fuel prices, specifically on unleaded gasoline for our commercial delivery. The actual frame is for the full year, not on a quarterly basis, so we''re going to see ebbs and flows in our spending as we progress through the fiscal year.
Scot Ciccarelli (RBC Capital Markets): In terms of use of cash, you looked to have paid down about $100 million of debt in the quarter. A couple quarters prior to that, buyback was the primary use of your cash flow. Now it sounds like you''re increasing spending or investment in the business. Can you help us understand how you are going to allocate the future cash flow?
Mike Norona: A big part of our cash flow is obviously going into inventory. I would say that''s the big driver. We don''t comment about some of the other things like share buybacks. I think most of our share buybacks was done at the beginning of this year. I think we''ve said we are going to look at our share buyback on an opportunistic basis and, as consistent with past practices, we don''t comment before we buy the shares.
Colin McGranahan (Sanford C. Bernstein): I know you''re about 80% hedged on diesel fuel, so outbound freight. It sounds like the pressure here is on unleaded gasoline so delivery to customers. When did the hedges roll off on the fuel that you''ve already hedged, and can you quantify what you think the impact is on total gas and diesel inflation this year and how you''re thinking about that going forward?
Kevin Freeland: The inordinate portion of fuel that we purchased operates the trucks in our stores that are the commercial delivery vehicles and, as you mentioned, those are not hedged. The minority factor is the diesel fuel for our tractor-trailers. Essentially, what we do is we hedge a major portion of that diesel fuel on annual basis, so we can give annual guidance. We would intend to hedge again for next year prior to giving that guidance. So, we''re insulated from that portion which is embedded in margin within any one fiscal year.
Mike Norona: The other item we haven''t talked about so far is the impact on store closings. Last year we closed roughly 15 stores. This year we''ve reassessed that. At the beginning of the year we were thinking 10 to 20, we''ve taken it up to 20 to 30. Now as I look at the impact compared to last year, I think last year''s impact was $0.05 to $0.06 and this year it''s going to be $0.09 to $0.10.
Darren Jackson: Last year, my recollection is more in the first half, this year, more in the back half. So, the bulk of that expense is coming in the second half still ahead of us.
Colin McGranahan (Sanford C. Bernstein): How are you thinking about the supply chain investment needs, infrastructure, and capabilities going forward? And when might you have a little bit more visibility to what those investments would be?
Kevin Freeland: It would reasonably take a shift in supply chain strategy to support the work at this point and, in the test market, we are also testing supply chain changes. Part of the $60 million investment is involved in studying effectiveness of different parts of the merchandising supply chain area, including a network study. So we are currently underway looking at the way the supply chain network is laid out. We have not completed that work, don''t have conclusions at this point and would get back with you at a future point.
Alan Rifkin (Merrill Lynch): I''m intrigued about the statement of $10 billion of revenue in five years. If we do some quick math, that implies a 15% in top line. And if you assume 50% commercial, you would have commercial growing from $1.5 billion at the end of this year to $5 billion five years from now, which is almost a 30% annual rate. Could you provide more color as to how you get to those top line numbers?
Darren Jackson: In the framework I give you, think about an artist''s rendering versus the detailed blueprint. And, when we back up, there are a couple things that go into that artist''s rendering. One, it starts with when we look at the commercial business in terms of the structural industry. In industry out there that''s, in terms of addressable for us, not less than $40 billion and arguably could be $45 billion.
It''s growing in terms of its own organic growth, not less than 4% and could be as high as 6%, depending on whose numbers you watch. And today, when we do our own math, we are 2.5% market share. And there doesn''t seem to be anyone dominant. There''s clearly good players out there and we''ve taken nothing away from NAPA and nothing away from O''Reilly.
But you can see as we position our business model with such small market share, the ability to leverage our structural benefit that we have are those store locations being real close to many of our commercial partners. And trying to think about how do we simply take advantage of that benefit and how do we participate in a very vibrant market one assumption is that just playing that market you have some wind at your back, develop the capabilities, it’s going to take some time.
What does the road map look like in order to get to that 50% mark - others might argue it has to be higher in light of the structural economics of that commercial market. On the DIY side, conversely, the good news is that our heritage is where it''s harder to make any headway, and we enjoy double-digit market share there. Structurally, it''s got a little better economics. We''re doing a lot of business today, $3 billion plus in that business and that probably doesn''t even equal half of what comes in our door every year.
And so how do we start by using simple types of techniques? We talked about attachment selling. We didn''t talk about weekend scheduling and getting those basics right, and how do we start to think about new product categories that are happening in the DIY space? GPS this year will approach $4 billion, that’s about as big as our company. When we look at the greater things that fit around a car we can see addressable markets today of $22 billion if you stretch your imagination. If you throw out fuel and throw out a bunch of stuff, we can see a number that''s ten times the number that we''re participating in today. But the truth is we don''t have it figured out as to which one, given our capability, will be most adept at trying to participate in.
Alan Rifkin (Merrill Lynch): Holistically, can you triple your commercial revenues over the next five years without a major, major shift in the distribution structure as you look at it today focusing on commercial?
Darren Jackson: If we don''t make investments to supply chain, merchandising systems, and, how we do commercial, be more of a sales driven culture and more of a distribution culture, the answer is no. We''re making investments in merchandising systems; we''re making investments in supply chain; we''re going to make investments in CRN systems for our team. And could this business go from $1 billion to $3 billion over the next five years; it better. That''s part of our growth plan as a company.
|
More:
