In the third quarter, the company opened 43 new stores; 39 of these new stores opened as Advance Auto Parts and four opened as Autopart International.

Year-to-date, the firm has opened 156 new stores, 139 as Advance and 17 as AI. The company closed two stores in the quarter and ten year-to-date. The new store productivity remained comparable to last year.

Advance Auto Parts is doing a complete review of its new store strategy and related occupancy costs as part of its overall strategy SG&A and CapEx review. That project is now well underway and the firm has identified a number of opportunities to more closely align its go-forward focus on what matters most in being a parts store, while reducing new store site and building costs.

The firm ended the quarter with 3,124 Advance Auto Parts stores and 104 Autopart International stores for a total store count of 3,228 stores.

Advance Auto Parts is in the process of returning to what matters most in the auto parts business to reinvigorate the sales and earnings growth.

The firm’s recent business strategy review and the related customer research provided good insight and background for its action plans.

- The firm is improving the parts availability. The company is implementing its plan to increase parts availability in its stores. The management believes that this will drive improvement in both DIY and commercial sales. The plan is focused on greater late model and foreign vehicle coverage, as well as being more aggressive in getting parts into its stores and closer to its customers. The firm’s plan to improve parts availability is on schedule. Some of this increase in coverage has now been distributed to its stores and it anticipates that much of it will be completed by year end. The firm expected to fund part of this increase by making its existing inventory more productive. That process is also underway and ahead of schedule. In the short term, the firm is making select investments in more parts inventory that it believes will help grow sales. Going forward, however, the firm is committed to grow sales at a rate faster than inventory growth.

The company is increasing its commercial focus. The management believes that it had missed meaningful opportunities to drive its commercial sales and as a result, its same store sales growth in this area had slowed. The firm continued to achieve 5% to 6% same store sales, but believes that undershot its potential in this area. With its increased focus on commercial sales, the commercial same store sales for the third quarter rose to 8%. The firm saw an improvement in commercial same store sales as it went through the quarter and the same store sales continue to run above 8% for the fourth quarter to-date. The company continues to look at store staffing and training, compensation policies, truck utilization, and many other areas to best structure for further commercial growth.

The company is changing its previous focus on the front room. As part of its ongoing business review, the firm is improving the productivity and efficiency of its sales floor or front room portion of its stores. The company is in the process of rationalizing and removing SKUs within sales floor categories, as well as full categories that do not align with its focus on parts and related items. The firm now has less frequent end cap rotation, fewer sales floor planogram changes, fewer price changes and less frequent rotation of point of purchase signage. The hours previously spent on these tasks are now being applied to parts-related, sales-driving initiatives.

Fourth Quarter Guidance

- The company reaffirmed the same store sales guidance of zero to 2% for fourth quarter. The firm continues to base its guidance on an assumption that a challenging macroeconomic environment will continue through the fourth quarter and because of the implementation timeframe, the sales-building initiatives will positively impact sales to a limited degree in 2007.

- The firm expects fourth quarter gross margin percent to be more in line with last year, as compared to the third quarter.
- The company expects to leverage SG&A in the fourth quarter, as a result of the expense initiatives that it has implemented.
- The firm expects earnings per diluted share in the fourth quarter to be 36 cents to 40 cents, an increase of 9% to 21%.
- In the fourth quarter, the firm expects its tax rate to be in the 37.8% to 38.0% range.
- In the fourth quarter, the firm expects its fully diluted share count to decrease to slightly less than 102 million shares, assuming no share repurchases in the fourth quarter.

Fiscal 2007 Outlook

The firm expects earnings per diluted share for the year to be $2.28 to $2.32. Excluding the 4 cents per share in severance, cost and asset write-offs recorded in the third quarter, earnings per diluted share for the year are expected to be in the range of $2.32 to $2.36, an increase of 7% to 9%.

The firm’s efforts to improve return on invested capital are beginning to show up in its free cash flow. As a result of lower capital spending and less working capital required, the firm is now increasing its free cash flow estimate for full year 2007. The company now expects free cash flow for the year to be in the range of $200 million to $220 million. This is an increase from the previous guidance of $150 million to $170 million and compares to $83 million in free cash flow generated in 2006, or more than a 140% increase.

The firm continues to expect to open 190 to 200 stores in 2007 through a combination of Advance and AI stores. The firm foresees approximately 30 relocations in 2007.

Fiscal 2008 Outlook

At this time, the firm continues to see a challenging sales environment where it believes that it is prudent for it to plan same store sales in the 1% to 2% range until it sees its trends show consistent improvement.
- The firm anticipates gross margin to improve incrementally by 10 to 15 basis points as it continues to pursue lower costs and leverage its logistics network, but it anticipates that these increases will be somewhat offset by a higher commercial sales mix.

- The firm believes that it can leverage SG&A in 2008 at the higher end of its forecasted 1% to 2% same store sales levels.

- The company has reduced its new store openings for 2008. Earlier, the firm had announced guidance of 140-150 new stores for 2008. As it looks at the significant changes in many parts of its business that its new strategy requires, the company now believes that its new store openings for 2008 will be in the range of 110- 120 stores. The firm would anticipate store openings will increase in 2009. The company anticipates store relocations to be in the range of ten to 20 stores in 2008 for the same reasons.