- The company introduced an incremental $45 million of hard parts and foresees the net addition of an incremental $125 million for the full year 2008.
- The company continues its pursuit of the highest quality brands with recent additions to offering, including MOOG chassis and Wagner brakes.
- The addition of these brands enhances the ability to serve important customer segments within the do-it-yourself and commercial markets.
- The company continues its focus on enhancing parts knowledge.
- The company increased its bilingual staffing levels by 16% compared to 2007 and still sees much room for improvement.
- The company opened 30 Advance stores and four Auto Part International stores as planned toward target of 115 stores for the year. It closed four Advance stores and relocated three.
Fiscal 2008 Outlook
- EPS are expected to be $2.55. However, a 1% increase in comparable store sales adds approximately 10 cents in EPS and a 10 basis point improvement in operating margins adds approximately 3 cents per share of incremental EPS.
- The company expects free cash flow to decrease more than anticipated for the balance of the year based on decisions made during the first quarter to make additional investments in inventory throughout the balance of the year.
Key questions from the first quarter earnings call conducted by Advance Auto Parts, Inc. on May 16, 2008.
David Cumberland (Robert W. Baird): Was the gross margin improvement related to effective pricing in the DIY or the commercial side and anything else you can add on that?
Mike Norona: From a gross margin perspective, there were two drivers of our gross margin, one was our supply chain and logistics costs and two was our pricing strategies. About 80% of it came from our supply chain and logistics distribution costs.
Elwyn Murray: The increase in balance of sale of our hard parts which are higher margin as you know was certainly beneficial to the margin. Secondly, we saw some nice increases in higher margin chemical or additive categories as people look to extend their fuel efficiency, fuel additives, fuel injector cleaners, things of that nature were certainly positive for us. As we see people delaying repair and trying to extend performance, things like stop leaks and other high margin categories have done well for us. I would also highlight that while commercial sales have grown and overall commercial gross margin is lower than DIY gross margin, we are making some nice progress with solidifying our commercial gross margin and selling our entire value proposition if you well in commercial versus simply dropping prices. As we look at our price indices which we monitor for parts as well as our sales floor, both are consistent with our recent past and where we want to be. Our category management team led by Charles Tyson and Scott Phelps continued to do a nice job leading and seeking cost of goods reduction opportunities for us and will continue to do that.
David Cumberland (Robert W. Baird): Do you feel like you still have more parts brands that you need to add, particularly on the commercial side?
Elwyn Murray: I would say that the addition of MOOG and Wagner were the final two pieces of the puzzle as far as we see it. There are some other opportunities but those were the two most significant and large and we are excited to have those in our stable.
Peter Benedict (Wachovia): Last quarter Florida had been a drag about 50 basis points in the overall business. How the trends are down in that region?
Darren Jackson: I do not think we have seen any real systemic changes in the balance of how the regions are playing. The one thing that is interesting though is that if you look at our commercial business, that is not true, we have seen strength in our commercial business across all of our regions. It is safe to say even a stronger in the Southeast. The way I would think about it is when we look at the balance of sales altogether, you can still see where some of the pockets of challenges are economically, whether it is because of the housing market, whether it is because of gas prices. When you climb underneath and look at where we are applying efforts against our strategy, even in places like Florida and the Southeast, you can see that it is working. We feel good about the fact that we are doing something different and gaining some market share, even in places where it is economically challenging.
Peter Benedict (Wachovia): Have you seen any customer migration, down to private label, to lower price points given the macro environment?
Darren Jackson: What we can continue to see in the numbers is that in the discretionary items, like tools, that is going to be DIY side, that continues to be just more challenging. What we call more the non-discretionary parts related categories we continue to see strength in places, just pick brakes, pick batteries; those businesses tend to be just fine.
Elwyn Murray: We have not seen a significant shift. Our private label or house brands have maintained a steady position without a significant upswing
Dan Wewer (Raymond James): Gross margin rates and commercial have solidified. Are you at the point where gross margins in the commercial segment are no longer at a disadvantage to the DIY category?
Darren Jackson: No, structurally the commercial business compared to DIY is lower. Candidly as we look ahead, we think systemically that will continue to be the case. As we work through building the relationships with our customers and build the basket that we are moving with some of our better customers and the mix of product, what we did see in the quarter, if you just look at commercial margin this year versus last year, it is fair to say they were up. Because of the growth in the commercial business in relation to DIY, on the overall company margin, it puts some pressure on the overall company margin. The good news is through our capabilities in pricing and the good news is in terms of the teams working hard to take some costs out of the logistics part of the pipeline, we are able to save money and offset that. That is the best of all worlds because our customers end up getting the pricing they are looking for, we are taking costs out of the back of the house and allows us going forward in terms of the profile of our margin to figure out ways on how to keep building on that momentum.
Dan Wewer (Raymond James): In past quarters in the discussion on the changing real estate strategy, Advance noted they may give less attention to the main locations and increase the emphasis on the best locations for your commercial customers. How do you square that with the goal of increasing your DIY sales per store 15?
Jim Wade: They align well. First of all our real estate team is making some good progress in regard to taking a broader view of real estate locations and we are starting to see some positive impacts already in terms of our occupancy costs. As we look at our business going forward and we are looking at where does the site make the most sense to be convenient to both our DIY customer and our garage customer, those align well and can reinforce each other as we get the right parts in the stores and have that optimal location. We do not see it as a challenge but see it as an opportunity to align two businesses better.
|
