This summary is based on the third quarter fiscal 2007 earnings call conducted by Advance Auto Parts Inc. (AAP: chart) on November 1, 2007.

Chairman, President, CEO: Jack Brouillard
EVP, Business Development: Jim Wade
EVP, CFO: Michael Moore
EVP, Merchandising Supply Chain and Technology: Elwyn Murray
General Counsel: Eric Margolin

Key Investors Issues

- Earnings per share rose marginally from 56 cents in prior year to 57 cents.
- Quarterly revenue grew to $1.16 billion, on 1.1% growth in same store sales.
- The firm repurchased 6.2 million shares for a total expenditure of $207 million.
- For fiscal 2007, the firm expects earnings per diluted share to be $2.28 to $2.32.

Third Quarter Fiscal 2007 Financial Highlights

Earnings per diluted share for the third quarter were 57 cents.

Excluding severance costs and asset write-offs associated with the company’s expense reduction initiatives, earnings per diluted share were 61 cents compared to 56 cents last year, an 8.9% increase.

In the third quarter, sales increased to $1.16 billion from $1.10 billion last year.

Comparable-store sales increased 1.1% in the quarter, comprised of a 1% decrease in do-it-yourself (DIY) and an 8% increase in do-it-for-me (DIFM). The 1.1% comparable-store sales increase compared to a 1.4% increase in last year’s third quarter.

While the sales started off slower at the beginning of the third quarter, as the weather in August became warmer, the firm began to see sales pick up and saw that momentum continue for the remainder of the third quarter. The company has also seen sales continue in the current range so far in the fourth quarter, and it believes that it is seeing a positive impact from its sales initiatives even though the macroeconomic environment remains challenging.

On a geographic basis, same store sales continue to be stronger in the North and Midwest and weaker in Florida and the Gulf Coast. The comparable store sales, excluding Florida and the Gulf Coast, were 2.1% in the third quarter. The same store sales in Florida and the Gulf Coast improved slightly over the second quarter.

During the third quarter, the DIY same store sales were a negative 1% compared to negative 0.6% last year. The firm believes that it is doing the right things to improve DIY and will be well-positioned over the next several months.

The commercial same store sales are 8% in the third quarter over 8.7 % last year. The steps that the firm is taking to refocus on commercial growth has started to show up in its same store sales, as the 8% comp in the third quarter grew from the 5.4% same store sales in the first half of 2007. The focus remains on getting commercial same store sales back to the double-digit run rate that the firm has previously achieved. The commercial same store sales continue to run in the 8% plus range in the fourth quarter to date.

Commercial sales, including Autopart International, represented 27% of total sales for the quarter. The total commercial sales were approximately $314.1 million, a 13% increase over last year. During the quarter, the company added 46 new commercial programs to its Advance Auto Parts stores, most of which were in new stores, bringing the total number of Advance stores with commercial programs to 2,571. Today, about 82% of Advance stores have commercial programs, compared to 81% for the third quarter last year.

The gross margin was 47.9%, a 28 basis points decrease over last year’s rate of 48.2%.

Gross margin was down from last year, primarily due to a less favorable merchandise sales mix this year. In addition, fewer discounts were earned as merchandise purchases were less than year-ago levels, and the firm had a greater proportion of commercial sales this year.

Third quarter was our most difficult quarterly comparison of the year. Third quarter 2006 was a 100 basis point improvement over the prior year, while the entire year of 2006 was 50 basis points higher than 2005. Looking forward, the company expects lower procurement cost and logistics efficiencies will more than offset the unfavorable rate impact of a greater mix of commercial sales and that its gross margin rate will grow over time by ten to 15 basis points per year.

LIFO was a $0.4 million charge in this year’s quarter compared to a $0.4 million credit in last years third quarter.


Going forward, the firm would expect modest LIFO credits in most quarters as the firm benefits from lower costs in most product categories.