O’Reilly Automotive - Earnings Call - Q1 2012
April 26, 2012
Transcript
Speaker 4
Good morning. My name is Lashandra, and I will be your conference operator today. At this time, I would like to welcome everyone. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Tom McFall. He may begin your conference.
Speaker 6
Thank you, Shanda. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement. The company claims the protection of the safe harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will, or similar words. In addition, statements contained within this press release that are not historical facts are forward-looking statements such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenue, and future performance. These forward-looking statements are based on estimates, projections, beliefs, and assumptions that are not guarantees of future events and results.
Such statements are subject to risks, uncertainties, and assumptions, including but not limited to competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental regulation, the company's increased debt levels, credit ratings on the company's public debt, the company's ability to hire and retain qualified employees, performance of acquired businesses such as CSK, weather, tariff activities, war, and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the risk factors section of the annual report on Form 10-K for the year ended December 31, 2011, for additional factors that could materially affect the company's financial performance. The company undertakes no obligation to publish whether as a result of new information, future events, or otherwise. At this time, I'd like to introduce Greg Henslee.
Speaker 1
Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Automotive first-quarter conference call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman, is also present. It's my pleasure to again congratulate Team O'Reilly on another outstanding performance in the first quarter and to the great start we are off to in 2012. The 7.4% comparable store sales increase we achieved on top of the 5.7% increase we generated in the first quarter of 2011 was a significant accomplishment, and we should all be very, very proud of our company's performance. Included in our 7.4% same-store sales gain was the impact of Leap Day, which we contemplated in our 4 to 6% guidance and have historically included in our comp store sales. Excluding Leap Day, same-store sales gains were still a very robust 6.1%.
We are also pleased to report we saw sequential sales improvement from the fourth quarter in virtually every area of our business. In historic markets, DIY and Do It For Me were both strong contributors to our comp store sales increase. In the acquisition markets, our professional installer business, the DIY business, was also a positive contributor in these markets and incrementally improved throughout the quarter as we got off to a slow start at the beginning of the quarter, driven, we believe, primarily by the lower miles driven in the Western U.S. in January, which were negative 1.5% compared to the remainder of the country at a positive 2.4%. Per year to the latest data available, total miles driven have increased 1.8% despite average as compared to last year. It's always difficult to determine the exact impact of winter, and early spring weather definitely had a positive impact.
In cold weather markets, the mild winter hurt some cold weather categories such as antifreeze, washer solvent, but by the positive impact of the early spring weather on categories such as brakes, suspension changes, and appearance chemicals, as our customers were able to take advantage of the nice weather to perform maintenance on cold. Comp store sales increases were relatively consistent throughout the quarter. We remain somewhat cautious regarding the sales environment and are setting our comparable store sales guidance at the 3 to 5% range. The beginning of the second quarter has gotten off to a somewhat slower start as we suspect a good amount of spring cleanup business was pulled forward from April into the first quarter as a result of the earlier-than-normal mild temperatures.
In addition, while gas prices have decreased a little over the past few weeks, they remain high, and we feel that this could negatively impact miles driven and consumer spending. However, we remain confident in the increasing average age of vehicles on the road, and consumers who remain under economic pressure will continue to drive solid demand in the automotive aftermarket. In addition to generating robust comparable store sales increases, we were able to maintain our momentum on the gross profit line as pricing remained rational in the industry. For the quarter, gross profit as a % of sales increased 136 basis points over the prior year. This improvement was the result of improved merchandise margins driven by acquisition cost improvements and our continued conservative and more focused advertised price strategy.
In addition, strong improvements in the productivity of our distribution centers were a major contributor to our gross profit results, and Ted will discuss that performance in more detail in a moment. Inventory shrinkage was also a contributor, and I'd like to acknowledge the fine efforts of our store operations and loss prevention teams for driving down shrink and keeping it at our historic low levels. When we look at the sequential change in margin from the fourth quarter of 2011 to the first quarter of 2012, overall margin is relatively consistent, however, different with better distribution center efficiencies, mostly offsetting lower merchandise margins by traffic drivers in the first quarter compared to the fourth quarter. We're optimistic we can continue to offer our customers attractive call-to-action advertised prices while protecting our margin, and we are confident we will continue to see improved leverage of our distribution costs.
As a result, we are increasing our full-year gross margin guidance by 50 basis points to 49.8% of sales. Now, I'd like to take a few minutes to highlight three of the many initiatives we currently have underway that will continue to enhance the level of service we provide our customers. First, we continue to be very excited about the proprietary electronic parts catalog we are developing. With the ongoing proliferation of SKUs in our industry, the electronic parts catalog is the key selling tool our team members use in our stores. Our ability to manage the content of our catalog and how the data is presented is a critical tool in equipping our team members to provide the best possible customer service. Over the past few weeks, I've spent time in the pilot stores specifically to observe our store team's interaction with customers using the new catalog.
The functionality of the system, the breadth of the product catalog, the ease of use, and the data we capture on lookups are all substantial improvements over our existing system. I would like to thank all the team members who have helped build, develop, implement, and test this fantastic new system. We are currently nearing the end of the pilot phase in 62 stores and plan to have the new electronic parts catalog installed in most stores by late summer. We'll continue to update you on the rollout of this very important initiative, and while there will not be an immediately measurable increase in sales from this implementation, we are very confident the increased level of customer service we are able to provide our customers will result in continued strong sales growth over time. The second initiative focuses on our never-ending efforts to enhance our inventory availability.
Over the next few, inventory stocked at the store level. Our goal is to have the parts our customers want on our store shelves even more often than we do today and to rely less heavily on our distribution center network, although our very robust network will continue to play a critical role in providing quick delivery for harder-to-find parts. The main inventory additions will focus on augmenting our store stocking levels to cover the vehicle demographics for a larger radius around the stores and enhancing the stocking levels of immature stores to ensure our store teams have all the tools they need to maximize their market share in these new markets. For the year, we expect about half of this additional investment to be offset by reductions of excess inventory in the acquired stores and distribution centers.
The last initiative I'd like to touch on is our efforts to continue to tailor our product offering to changes in customer preference. During the course of the recession, we have seen a continual trend for customers to trade down the value spectrum. National name brand parts continue to be a key component of our product offering, especially on the professional installer side of the business. However, with higher demand for good and better products, we are increasing our focus on our private label brands. The use of private label brands gives us better control over the application coverage we make available, allows us to provide an exceptional value versus quality balance, and improves our gross margins.
We will continue to tailor our product offerings to meet customer demand, and our private label brands, which currently comprise approximately one-third of our sales volume, will be an important part of this mix shift over time. In closing, I would like to thank all of Team O'Reilly for your focus on providing the outstanding customer service levels that we offer our customers every day. Your hard work, dedication, and expense control focus during the quarter resulted in the company record operating margin of 16.2% and an increase in adjusted earnings per share of 37%. I think it goes without saying that we remain very optimistic about the future results our company will achieve. I'll now turn the call over to Ted Wise.
Speaker 5
Morning, everyone. Thanks, Greg. The first quarter clearly demonstrates the fantastic results Team O'Reilly can generate when hitting on all cylinders. By executing our dual market strategy and adhering to our Live Green culture, we were able to generate robust sales growth at very strong gross margins. At the same time, control our expenses resulting in a record operating margin of 16.2%. Looking at our historic markets, there is no doubt that the mild weather was a tailwind in many of these markets. However, I would like to commend our team for providing excellent customer service and capitalizing on the additional sales opportunities that the weather provided. We opened 69 new stores in 21 different states with not more than 10 new stores in any one state. With our 23 distribution centers, all with additional growth capacity, we've been able to spread our growth out across the country.
Without a high concentration of growth in any individual market, the store operations and professional customer sales teams have been able to build their management benches, and new stores are opening with better seasoned and trained store teams. Of the need to manage the store resets that we've completed in the last few years, our management teams in the acquired markets out west have been able to focus on fully implementing our dual market strategy. This sole focus is definitely evident as the management and sales teams better understand the systems, products, and the programs we are able to offer our customers. The store operational leadership in the acquired markets has improved greatly, and store execution is markedly better, but we continue to focus on training to build on the momentum we've created.
We continue to see great opportunities to build the business in these markets as we improve the consistency of our store operations, build stronger relationships with our professional customers, and the O'Reilly brand recognition incrementally increases over time. One of our main focuses across the entire chain continues to be to build our DIY business. In addition to the electronic parts catalog and the inventory initiatives Greg touched on earlier, we remain focused on several operational initiatives to improve customer service. These include improving our e-scheduling system to better align our staffing with customer traffic, especially on nights and weekends, enhancements to our e-training capabilities, and an introduction of a new program called LEAD that's designed to better identify, train, and mentor high-potential team members. We feel at the store level we continue to have tremendous opportunity to grow both the DIY and the professional installer business.
I would like to thank the store teams for the great customer service they provided during the quarter while continuing to be excellent expense managers. Next, I would like to spend some time discussing the results and highlighting some of the initiatives from our distribution team. I won't go into specific numbers. Our distribution team set very aggressive goals for 2012. In 2011, the new DCs in the acquisition markets incurred substantial costs supporting the changeovers and reducing overstock inventories in the systems that had built up initial hard parts changeovers. As you recall, we added 170 new stores in 2011 while actually reducing inventory by $38 million.
With the changeovers complete and most of the excess inventory eliminated from the system, the DCs in the acquisition markets are fully focused on improving their efficiency by continuing to train their teams, and through the first quarter, are accomplishing their aggressive plan. The DCs in our historical markets continue to perform exceptionally well, but since they are a competitive group committed to providing outstanding customer service while controlling cost, they have also set aggressive improvement goals. Over the past three years, the distribution team has accomplished the remarkable feat of opening five new DCs, converting two acquired DCs to our system and processes, and relocating one DC while never missing a beat in providing outstanding customer service to our stores. Now we're excited to have the opportunity to go back and implement additional efficiency projects in our existing DCs.
A few of these projects included continuing to roll out our paperless voice-directed warehouse management, which is three that have not been converted from the paper-based systems, and then also improving planning and updating material handling system throughout the entire DC. We are confident we will see good returns from the DC retrofit project. I'd like to thank our customer service they provide our stores day in and day out. Their ability to provide industry-leading quality while controlling cost is a major factor in our 136 basis point year-over-year improvement in gross margins. Now, before I turn the call over to Tom, I'd like to touch on two additional areas: advertising and new store growth. On the advertising front, our ability to focus on the O'Reilly brand has dramatically improved the impact and efficiency of our advertising spend.
Our brand recognition in both existing and new markets has benefited from our new national TV advertising campaigns. We are pleased with the result of our advertising initiatives and are optimistic about the prospect of building our brand recognition moving forward as we continue to build on our operational momentum in the acquired markets and leverage our national platform for promoting the O'Reilly brand. Regarding store growth, during the quarter, as I mentioned earlier, we opened 69 net new stores. This is a record number of new stores for the first quarter as a model to progress very smoothly in cold weather markets and complete new stores that normally stick to the second quarter. In general, we continue to see great opportunities for expansion at affordable prices as the ongoing microeconomic climate puts pressure on real estate prices. In addition, we continue to upgrade our existing store base.
During the first quarter, we relocated 10 stores, eight of which were upgrades to former CSK stores, and we also completed 19 major renovations. Thanks to our new store installation teams and to the new store dedication, we're off to a great start in 2012, very comfortable we will hit our net new stores this year. Now, I will turn the call over to Tom McFall.
Speaker 6
Thanks, and call it our guide. Comparable store sales for the quarter, excluding Leap Day, increased 6.1% on top of the prior year comps of 5.7%, with professional sales driving a higher portion of the gain. However, DIY sales were strongly positive and accounted for the comparable store increase with flat customer count comps. DIY traffic gets in the difficult macroeconomic factors consumer space. For the quarter, those increased $147 million, comprised of a $101 million increase in comp store sales, a $44 million increase in non-comp store sales, a $3 million increase in non-comp non-store sales, and a $1 million decrease from closed stores. For the second quarter, our comparable store sales guidance is 3 to 5%, so we believe some portion of the spring business we usually generate in April shifted into the first quarter due to the mild weather.
Our sales guidance for 2012 is unchanged at $6.1 billion. Our full-year comparable store sales guidance is also the same at 3 to 6%, driven by strong growth in the professional side of the business, especially in the acquired markets, and a slower growth rate on the DIY side of the business. Gross profit for the quarter increased 136 basis points over the prior year to 49.8% of sales. The largest contributions, which we expect will continue for the next few quarters, as we finish cycling the costs of last year's front-end resets and excess inventory returns. The increase also was supported by improved merchandise margins resulting from improved acquisition costs and a more conservative focused advertising price strategy versus last year's first quarter. As Greg mentioned, 4 to 49.8% of sales. We anticipate the quarterly gross margins to be relatively cut across the three remaining quarters.
During the quarter, SG&A improved 61 basis points to 33.6% of sales. The extra day in the quarter helped leverage approximately 15 to 20 basis points. This tailwind was mostly offset by a 60% increase in new store openings during the quarter, as new stores carry a much higher SG&A rate. Drivers of the expense leverage included strong sales, the mild winter weather lowered expenses on expenses such as utilities and snow removal, and better leverage on our advertising spend. We utilized national advertising medium. These positives were partially offset by higher store-level payroll, as our operations teams dynamically adjust store-by-store payrolls to ensure we have the store-level hours we need to grow the business. Our current plan is to continue to run at a roll for the remainder of the year as we work to capitalize on our customer service initiatives.
As a result, we now expect to be in the upper end of our annual per-store SG&A guidance, which is an increase of between 1.5% and 2%. Operating margin for the quarter was 16.2% of sales, representing a 197 basis point improvement over the prior year, as we saw strong sales and gross margins combined with good expense control. Based on our first quarter performance, our increase in expected full-year gross margin as a percent of sales, partially offset by higher expected store payroll, we're raising our 2012 operating margin guidance from 15% to 15.5% to 15.4% to 15.9% of sales. Diluted earnings per share for the first quarter of $1.14 a share represents a 37% increase over prior year's adjusted diluted earnings per share of $0.83. As a reminder, the adjusted earnings per share from the first quarter of 2011 excluded the one-time charges from our financing transactions.
Moving to the balance sheet, we continue to make great progress in improving the productivity of our net inventory. At the end of the quarter, our inventory turnover net of payables was 4 times versus 2.6 at this time last year. While inventory per store is down 5% versus the prior year, the initiatives Greg discussed earlier will mostly offset this reduction, and we continue to expect per-store inventory will be relatively flat for the full year. The driver of the net inventory productivity has been our ability to work with our vendors to improve terms through our vendor financing program. At the end of the quarter, our adjusted debt to adjusted EBITDA was 1.68 times, which remains well below our long-term targeted leverage range of 2 to 2.25 times. While we'll incrementally increase our leverage over time, we remain very committed to maintaining our investment-grade ratings.
For the first quarter, free cash flow improved 70% to $339 million. This strong improvement was driven by an increased net income, the improvement in our net inventory investment, and reduced capital expenditures relating primarily to no acquired store conversions in 2012. Based on our results today and the increase in our expected year-end AP inventory ratio, we are increasing our 2012 full-year free cash flow. During the first quarter and through the date of this printing release, we have repurchased 1.8 million shares with an average price of $87.10. This brings our repurchases to date to 17.7 million shares with an average price of $64.14. Our first priority for the use of free cash continues to be to consolidate the industry through accretive acquisitions.
To the extent these opportunities are not available, we intend to continue to prudently execute our share repurchase program with a $500 million sheet and additional free cash flow generated during the year. Our guidance for the second quarter and the full year takes into account the shares repurchased through yesterday, but does not reflect the impact of any potential future share repurchases. For the second quarter, our diluted earnings per share guidance is $1.13 to $1.17 per share. For the full year, our diluted EPS guidance is $4.47 to $4.57 per share. At this time, I'd like to ask Shanda, the operator, to return to the line, and we'll be happy to answer your questions. Shanda?
Speaker 4
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. All participants are allowed one question as well as one follow-up question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Michael Baker.
Speaker 2
Hi, thanks, guys. Can you hear me okay?
Speaker 1
Yes.
Speaker 2
Great. My question is on the commercial penetration within the CSK stores. I think if I recall, at the time of the acquisition, commercial was about 10% in the acquired stores. You guys have talked about a goal of getting to 40%. Correct me if I'm wrong, but towards the end of last year, I think you were at 30%. If you could let me know, let us know where you are now. Relative to the fourth quarter, did the commercial business within the acquired stores accelerate more or less than the total comp acceleration? That's the first question. The second is just a clarification. You said it a couple of different ways. I think I got confused. On your pricing this quarter, were you more or less sharp in your pricing in the first quarter versus the fourth quarter? Thanks.
Speaker 1
To answer the last question first, the description that we were trying to give without going into too much detail is that the pricing we refer to is our advertised price, just promotional price. What we've done is we've just taken the position that we're running a little sharper, you know, call-to-action type of advertised items and running them for a shorter period of time. The exposure to gross margin erosion is probably a little bit less, but we get more activity as a result of those ads, which is the reason that we're running them. On CSK, the mix of commercial business continues to increase a little bit. We'd be about 200 basis points or so ahead of where we were last time we talked. Around 32% would be the commercial business number right in that area. What was your other question, Michael?
Speaker 2
Just in terms of your acceleration in your comp to 7% from 3% last quarter, a nice acceleration. Where did you see the biggest acceleration? Was it commercial? Was it DIY? Was it the acquired stores? Was it the core stores?
Speaker 1
We don't get into breaking down the comps between the different types of stores we have, but we saw a good pickup in both the DIY and DIFM side of the business.
Speaker 2
Okay.
Speaker 1
The CSK commercial continues to be our highest performing comp % sector of our business, of course.
Speaker 2
Thanks.
Speaker 4
Your next question comes from Gary Balter.
Speaker 0
Hey, it's Simeon for Gary. Can you talk about the slow start you mentioned in Q2? Can you comment on whether you're already within the range that you gave? Do you have a best guess on how the weather impacted the company in the first quarter?
Speaker 1
You know, we really don't have a guess. We know that the weather was a positive because of the early spring weather. We feel like there was a lot of work done in appearance chemicals and some other maintenance items that probably wouldn't have been done in March that would have typically been done in April. As far as the comp, we have a little bit of a, through this point in the month, we have a little bit of a misalignment with our weekends, which significantly impacts our measure of comparable store sales. What I would tell you is we're right around the range that we gave for our quarterly comp, but that we're comfortable with the comp guidance that we gave of 3% to 5% for the quarter.
Speaker 0
Okay. The follow-up on inventory, can you talk about what type of inventory you're adding? I mean, presumably, you know, you're best in class already. Is it categories that you're filling, or are you just trying to expand your lead in certain categories?
Speaker 1
Yeah. Part of it is the expansion of some private label lines that we want to have better coverage on. You know, today, lines that we duplicate, a branded line with private label, we might have or we would have fewer SKUs in private label than what we have in the branded line. We're expanding some of those private label lines. Part of it is just the way we approach the method by which we deploy inventory. We've just seen an opportunity to improve the science by which we deploy inventory, and we decided to use that in our new stores. In doing that, we've decided to roll that out to some of our existing stores. What we're talking about is application parts or hard parts. This would not change the way we manage our display areas.
Speaker 0
Is there demand for either lower price point, or is it higher quality?
Speaker 1
It's a mix. I think some of the private label products that we sell today are higher quality than they were a few years ago, and there's demand for those products. Because they were priced lower during the recession, we saw good demand for those private label products.
Speaker 0
All right, thanks.
Speaker 1
Thanks.
Speaker 4
Our next question comes from Kate McShane.
Speaker 3
Thanks. Good morning.
Speaker 1
Hi, Kate.
Speaker 3
Good morning. I wanted to follow up on the inventory question as well. I wondered if you were able to quantify any kind of complex or margin lift you are expecting from this initiative, and just more detail on the timing.
Speaker 1
It wouldn't be a significant margin lift. I don't know what time you got to come in on that. The additional inventory we're talking about is an area to provide more offering to satisfy more customers. It would be an opportunity to increase sales. Obviously, we look closely at the turns of all our inventory, and we're expecting to get good productivity out of this inventory. The timing will be, you know, it's a pretty major change in initiative, and the lines will start rolling out here in the next couple of weeks, and it'll take four or five or six months to complete the process.
Speaker 3
Okay. Thank you.
Speaker 1
Thanks.
Speaker 4
Our next question comes from David Gilbert.
Speaker 0
Good morning, guys. The first question I had was on gross margins. Just curious, you mentioned price optimization in some of the front room categories in the past, and just curious if you could give us an update on where you are in terms of rolling that out across categories. The follow-up, just looking at the SG&A per store, you know, clearly a little bit higher than the range in the first quarter. I was just curious if you could kind of dimensionalize how much of that was due to the higher store openings in the first quarter than maybe expected versus some of the higher staffing levels.
Speaker 1
I'll take the price optimization question, David. We're less than halfway in rolling that through our display area categories. Today, our plan is to use this software only on display area categories, but some of the things that this software does, we will apply to our backroom lines over time, but we've not begun that process yet. We're less than halfway with that rollout. I wouldn't expect a material impact on our gross margin from the remainder, but it does give us the ability to better balance our desires to drive demand on certain items with optimizing our gross margin, and that's what we're working on there. On the SG&A per store related to the new store openings, Tom, I don't know if you have a comment on that.
Speaker 2
That is a driver of SG&A being higher on a per-store basis. What I would tell you is when we look at our internal plan, we're very comfortable with where SG&A came out for the first quarter, and in context of our 1.5% to 2% increase for the year, continue to be comfortable with that. From our standpoint, we have some difference in timing of expenses, and expenses flowed out as we anticipated in the first quarter with some positives from the weather offset by the higher store payroll we decided to run. Looking forward, we're moving up in our guidance because we anticipate continuing to spend a little bit more on store-level payroll. The percentage growth year over year is higher than our range, but when we look at our plan for the year, it's right within our expectations.
Speaker 0
Okay. Great. Thank you.
Speaker 1
Thanks.
Speaker 4
Your next question comes from Greg Melich.
Speaker 0
Hi. I had two questions. One on the private label penetration, that third that it is today. What was that a year ago, and how much of that is more foreign direct imports as opposed to more traditional private label?
Speaker 1
A year ago would have been close to 30%, probably just under 30% in that area. It's a mix of application parts. It could be antifreeze and motor oil and a lot of different things. Part of our foreign car part strategy is private label. When you say import, I assume you mean for import cars and not just imported product, correct?
Speaker 0
I was actually talking about imported product, but yeah, if you can answer it, imported cars, that'd be great too.
Speaker 1
The majority of the private label products that we would carry in hard parts would be products that are made outside the country. A big portion of our strategy today is to improve coverage for imported cars, and some of that coverage is being added to our private label lines and product brands that we own, and we'll continue to do that. Much of the product is directly imported by us.
Speaker 0
Great. Second, on weather, you mentioned how it did help. If you look at history where you've had that sort of really mild winter, what can you tell us in terms of categories or % of sales and their impacts if you look again at history, not necessarily pull forward, but just the fact that some parts may not fail as much like batteries or hoses if they never got as brittle over the winter?
Speaker 1
Yeah. Here's, you know, weather is, as I said earlier, it's hard to predict the impact weather has on our business. What I can tell you is that a mild summer has more of an impact on it than a mild winter. The reason I would say that is this. In a really hot summer, car batteries bake. That's really what causes the failure or one of the things, one of the primary things that causes premature failure of car batteries. A lot of times, you won't see the symptom from a battery that's been overheated for a long period of time until the battery is loaded in cold weather. It takes more cranking amps to start a car in cold weather than it does in hot weather. It would be hard to quantify any difference that we would potentially see based on us having a mild winter.
I would say that it would be minimal. I would say the effect that we've talked about to this point has just been the pull forward in business that we typically wouldn't have seen as early in the year as we saw this year, but we wouldn't expect demand to change much. One thing that you can watch for, of course, is if we were to have a very mild summer, you know, not a hot summer that affects temperature control parts, air conditioners, things like that, and some of the cooling system parts. That can have an effect. Providing we have a hot summer as is predicted, I would expect demand to be good.
Speaker 0
That's great. Thanks a lot.
Speaker 1
Thanks.
Speaker 4
Your next question comes from Denise Chai.
Speaker 0
This is Sam for Denise, and thanks for taking my question. I wanted to ask about your vendor financing program. If you guys could just give us an update in terms of the % who are fully or partially on that at this point.
Speaker 1
We have about 40% to 45% of our vendors signed up for the program. That's when we look at the total population. We still have opportunities with a few of our larger vendors where we think there's a cost-savings opportunity, a win-win situation. Some of the vendors that are not candidates, an example would be, you know, the oil manufacturers are not a great candidate to be on that program based on the size of those companies. Of the total population we have signed up, the 40% to 45%, their buckets are approximately 75% full where they are in the cycle program. One thing I'd like to add is all things being equal, just based on the flow of our business. If we didn't have the impact of vendor financing, when we go into the fourth quarter and business slows down in our industry, our AP inventory churn slows down.
All things equal, the end of the first quarter would be a higher percentage than the end of the fourth quarter. Our expectation is that we'll continue to build the percentage even against that seasonal trend due to our vendor financing program continuing to add leverage for us.
Speaker 0
Tom, could you maybe just put it in context that, you know, like the 45% now, like where was that over the past couple of quarters?
Speaker 1
This is a program that we had before we bought CSK, and to finance the CSK acquisition based on the credit markets, we had to use an asset-backed loan facility, which really took us out of the vendor financing program. If we look back to the first quarter of last year when we went and issued our public bonds and became unsecured, that's really when we launched the program. This headway has all been made in the last calendar or in the last 12 months.
Speaker 0
Right. Okay. Just as a follow-up, your advertising program, I know in the past you've preferred radio. Is that still the case? I know you made some comments that your national TV campaign was doing well. Is that how you look at that going forward?
Speaker 1
I think at this point we still prefer radio, although we are allocating a pretty significant portion of our budget this year to television advertising. We also like sponsorships of sporting events, you know, basketball, NASCAR, NHRA, and a variety of other events. Radio would still be a big part of our spend. We'll just kind of evaluate how TV does this year, this being the first year in a while we've used television, and see what we think of the results and make a decision as to how we proceed next year.
Speaker 0
Okay. Great. Thanks so much.
Speaker 1
Thanks.
Speaker 4
Your next question comes from Alan Rifkin.
Speaker 0
Thank you very much. Congratulations on a nice quarter, gentlemen.
Speaker 1
Thank you.
Speaker 0
You mentioned your ability to accelerate new store openings in Q1 due to the favorable weather. Would you be able to quantify how much that added in expenses to the quarter, and would it be reasonable to assume that we will be saving on those expenses in Q2? That's my first question.
Speaker 1
The answer to that would be we won't save on those expenses. Once the stores are open, we're generating closed expenses. As the stores open up and their sales pick up, the impact on our SG&A % will diminish.
Speaker 0
Okay. Tom, the pre-opening expenses associated with any store that opened in Q1, that was a Q1 expense. Is that correct to assume? That won't recur in Q2?
Speaker 1
That portion is true. The bigger driver is, you know, when the stores are operating, you know, what's their % of payroll? You know, their sales are just building, but the expenses for the store are relatively fixed.
Speaker 0
Okay. Just a point of clarification, if I may, in response to Michael's question earlier. In your goal to get the CSK commercial proportion up to 40%, that's more of a function of just a strength in their DIY business as opposed to a function in your disbelief that you can't get it up to the 50/50 proportion that a legacy store has. Is that fair?
Speaker 1
Yeah. Our objective is to do as much business as we can at the appropriate gross margin. While we would expect these stores over time to have a market share that would be very similar to the historical O'Reilly stores, the differences in some of these store locations would drive us to have that business mix projection. Just because some of the stores, as we've talked over the last couple of years, are in locations that wouldn't be as conducive to having robust commercial programs, we're just giving an estimate of where we think we could go to based on some of those stores being in positions that wouldn't be as conducive to having commercial programs that would operate to the degree that many of our historical O'Reilly stores do.
Speaker 0
Okay. One last question, if I may. Your ability to increase the AP to inventory ratio in this quarter in particular was really quite remarkable. You're basically at where your goal was for the end of the year. Could you maybe elaborate a little bit on how you were able to get that ratio to increase so quickly, so soon, so much by so soon?
Speaker 1
We have great support from a great vendor base, and our suppliers are working hand in hand with us to grow our business. We have a very good vendor financing program that some are participating in, and we've just been very pleased with the vendor cooperation that we've had in establishing improved terms, many with use of our financing program.
Speaker 0
Okay, thanks, Greg. Congratulations again.
Speaker 1
Yeah, thank you, Alan. You bet, thanks.
Speaker 4
Your next question comes from Scot Ciccarelli.
Speaker 0
Hi, guys. I think that's supposed to be Scot Ciccarelli.
Speaker 1
Hey, Scott.
Speaker 0
Hi. Can you guys help me understand something? Maybe I'm just a little confused about, you know, what I think of are somewhat conflicting comments here. You talked about slower, I thought it was slower sales growth or lower miles driven on the West Coast as a reason for a slow start. I'm assuming that impacted sales on the West Coast or your acquired markets. Yet CSK commercial is still the fastest growing segment in the country. Clearly, I misheard something. Can you just help me? Can you help clarify those two different comments?
Speaker 1
Yeah. Scot, what we were talking about is just we were defining how the CSK acquired stores had performed, and you know they did very well at the end of the quarter on the DIY side. We would generally reflect that side as being more impacted by miles driven because I don't think we're taking as much share on the DIY side as we are on the dual market side. The dual market side is also impacted by miles driven, but on the dual market side, we're taking a significant amount of market share, and we've had very robust growth there. What we were talking about is just the progression of the quarter and saying that on the DIY side we started out in January a little slower in the CSK stores, and that ramped up as the quarter progressed and miles driven improved.
We've just got good weather results, things like that. On the dual market side, we had good sales growth throughout as we continue to take market share out there.
Speaker 0
I got it. Very helpful. Just regarding one more question regarding the gross margin, you talked about the increase in private label. Did the private label penetration increase have any kind of noticeable impact on the gross margin performance?
Speaker 1
It is favorable to gross margin. I don't have a number here with us today to tell you the effect of the private label change from a year ago from maybe, I don't know, 29% to a third it is today. It would have an impact. Our private label business generally generates a better gross profit percentage than our branded business.
Speaker 0
it fair to assume that gross margins could be heading kind of north from where they are if private label does continue to increase as a % of sales?
Speaker 1
The mitigating factor is that many of our professional customers prefer the branded products, and that side of the business is growing faster than our DIY side.
Speaker 0
Got it. All right. Thank you very much.
Speaker 1
You bet. Thank you, Scot.
Speaker 4
Your next question comes from Dan Wewer.
Speaker 0
Tom, the inventory per store declined about 5% year over year at the end of the quarter. With the addition of the private label assortment, do you anticipate that adding to your inventories per store going forward, or will you be editing some of the branded items out?
Speaker 1
We're going to add net inventory to the stores. The timing of when these roll out is impacting our average per store. Our expectation from the beginning of the year, and it's the same now, is that we will be relatively flat on a per-store inventory basis.
Speaker 0
Can you educate us on how your vendor financing program works with you with this private label initiative?
Speaker 1
For the private label, you know, that's a great opportunity for us to employ our vendor financing program with the manufacturer who's manufacturing those parts for us. We would talk with those vendors, some of which are the same vendors that produce brand name parts. You know, it's an equal opportunity whether it's private label or brand name.
Speaker 0
You had also noted that the private label penetration was about 29% a year ago. Now it's at 33%. I believe AutoZone's around 50% or so. Is that the type of threshold that you see O'Reilly reaching someday?
Speaker 1
I don't think so. Some of our main product lines, you know, and I won't name all of them in case any of our suppliers read our transcripts. I want all of our suppliers to feel secure in our relationship, of course. You know, belts and hoses, filters, chassis parts, many, many products that we carry, we're very loyal to the suppliers and the brands that we have in place. Our customers are very pleased with those brands. We won't go to the extent that AutoZone has in the foreseeable future on private label products, but we will continue to augment our existing private label program with additional coverage. We may possibly change some product lines to a more private label dominant position, whereas today we have more of a branded dominant position.
Speaker 0
The key advantage of the growth in the private label assortment will be in growing your do-it-yourself market potential. It's not really a commercial opportunity.
Speaker 1
For the most part, that's correct. The other advantage, of course, is that it gives us better control over the coverage that we have. If a certain supplier that we're aligned with doesn't provide coverage for a certain array of vehicles in a market that we're in that may have an unusual vehicle population, with private label, we're able to source those products and put them in our private label and provide coverage for that market. Whereas with a branded product where you might not have as much national coverage for the vehicles that might exist in a little niche market, it might not make sense for them to tool up or to carry those products. It gives us more flexibility.
Speaker 0
Great. Oh, that's very helpful. Thanks.
Speaker 1
Okay. Thank you, Dan.
Speaker 4
Your next question comes from Colin McGranahan.
Speaker 0
Good morning. Just a couple of quick questions on ticket and traffic. It sounded like traffic was relatively flat, and I think that's been the trend for a while. Can you talk a little bit about what you're doing with advertising, the pricing, you called it the call to action, you know, a little sharper, a little shorter, and you know how that's impacting the traffic overall and whether you see any reason to think traffic might get a little bit better?
Speaker 1
Our strategy is to run ads that would be for items or maintenance processes that a customer would do most frequently, run those at a price that would cause a consumer to come to our store, hopefully customers that maybe haven't come to our store before and hopefully decide that they like our location and our people and become our customer. Our strategy is to try and drive more traffic. I think we were reasonably successful with doing that in the first quarter and that we had solid DIY comps as a result. We will continue to execute a strategy similar to that as appropriate.
Of course, by doing this and by having maybe a little sharper price on some of these items, we don't run them for as long a period of time, which allows us to maybe not take as much of a margin hit for customers that were coming into our store to buy products anyway and then just realize when they're in our store that we have an item at a great price. We're trying to employ a strategy that we benefit from the traffic but not the erosion of margin or not take the hit for the erosion of margin for the length of time that we had previously ran these kinds of ads.
Speaker 0
Greg, that's helpful. Obviously, it's a customer acquisition tool. Do you have any data or any sense of how sticky those customers are? I mean, are these the bottom feeders that are just shopping price on oil and the oil change package and maintenance items, or are you actually able to successfully turn them into kind of consistent repeat customers?
Speaker 1
Some are the former. That's very hard to measure. We're trying to put in place programs that will give us a better method to measure that through customer identification, customer loyalty programs, things that give you a way to ID a DIY customer when they make a transaction at your store, and you can kind of measure that better. Today, we don't have a good measurement of that, or at least as good a measurement of that as we would like, but we are in the process of implementing programs that would allow us to better measure that.
Speaker 0
Okay. The flip side of that, obviously, was a very nice increase in the ticket, clearly about a 6% increase in the ticket except Leap Day. Can you give us any sense of how much of that was increased AUR, increased UPT, or a mix effect?
Speaker 1
We're definitely seeing some inflation in categories, especially oil-based and some of the commodities. That's driving part of it. You know, probably about half, about half is continued shift to more hard parts and less accessories, so about half and half.
Speaker 0
Okay. Great. Thanks, guys. Very helpful.
Speaker 1
Thanks, Colin.
Speaker 4
Your next question comes from Daniel Hofkin.
Speaker 0
Good morning, gentlemen. Very nice results. Just a quick question, and I apologize if this was asked earlier. Can you remind us of kind of what the comparison trend is in the balance of the quarter? I seem to recall that especially in May and the first part of June last year, things slowed down a little bit before picking back up.
Speaker 1
Actually, month by month, we were pretty consistent throughout the quarter. May took a little bit of a dip, and then June popped back up, but there really is not enough difference to really call out one month as being a much larger month than the other. We have pretty consistent comparisons through the three months of the second quarter.
Speaker 0
Okay. I guess, beyond it sounds like most of the demand pull-through to the degree that you're able to tell that that happened would have been relative to what would have happened in April. Is that fair to say?
Speaker 1
That's what we're estimating.
Speaker 0
Okay. Is there a way to sort of gauge how much you think that might have helped one Q?
Speaker 1
It would be a guess at best. We look at our sales by category, and clearly, some of the categories that you would logically think would be categories that could be positively impacted by mild weather coming out of the spring that you would typically see growth in, and in spring weather, those categories did well. We would expect that there was some pull forward in those categories, but to quantify it would be very difficult.
Speaker 0
Okay. In the first two months of the quarter, was weather, you know, in January and February, was weather a net negative or neutral? I mean, clearly, it was a positive in March, just wondering kind of what your thought is on the weather impact as the quarter progressed.
Speaker 1
Yeah. I think in January is probably a little bit of a negative, and then more of a positive in mid-February to March. January was kind of a mild winter weather, but spring wasn't here yet, so we're kind of in that in-between zone. Our business benefits from extremes, although the demand for parts and products always comes around. If a battery is going to fail and it doesn't fail, or it's on the edge of failing, and we don't have, you know, three zero-degree nights in a row that would cause it to show the symptom that it's failed, it's going to fail in a couple of three months or something. It's not going to last another year because it didn't get to zero degrees for three nights in a row.
Sometimes the demand might get deferred because of weather, but I don't think that weather plays a long-term role in demand for products in our business.
Speaker 0
Right. It was more just a question about within the quarter.
Speaker 1
Sure. Yeah.
Speaker 0
Okay, thank you very much.
Speaker 1
Okay, thank you, Dan.
Speaker 4
We have reached the end of our Q&A session. We'll turn it back over to the leader.
Speaker 1
Thank you for everyone's attendance on our call this morning. We were happy to report solid results in our first quarter, and we'll look forward to reporting good results to you at the end of our second quarter. Thank you very much.
Speaker 4
This concludes today's conference call.