Earnings Labs

Advance Auto Parts, Inc. (AAP)

Q1 2008 Earnings Call· Fri, May 16, 2008

$55.93

-1.19%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+0.72%

1 Week

-2.29%

1 Month

+3.17%

vs S&P

+9.06%

Transcript

Executives

Management

Judd Nystrom – Vice President Finance and Investor Relations Darren Jackson – President, Chief Executive Officer Elwyn Murray – Executive Vice President Development Officer DIY Jim Wade – Executive Vice President Customer Development Officer Commercial Mike Norona – Executive Vice President, Chief Financial Officer Kevin Freeland – Executive Vice President Supply Chain and Information Technology

Analysts

Management

David Cumberland – Robert W. Baird Peter Benedict – Wachovia Dan Wewer – Raymond James Colin McGranahan – Sanford Bernstein William Keller – FTN Midwest Tony Cristello – BB&T Capital Markets Seth Basham – Credit Suisse

Operator

Operator

Welcome to the Advance Auto Parts first quarter 2008 conference call. (Operator instructions) Before we begin, Judd Nystrom, Vice President Finance and Investor Relations will make a brief statement concerning forward-looking statements that will be made on this call.

Judd Nystrom

Management

Good morning and thank you for joining us on today’s call. Certain statements made during this conference call will contain forward-looking statements that incorporate assumptions based on information current available to the company. Any statements that are not related to historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks, uncertainties and assumptions, including those listed from time to time in the company’s annual report on form 10-K and its other filings with the Securities and Exchange Commission. If any of these risks or uncertainties materialize or if any of the underlying assumptions prove incorrect, the company’s actual results may differ materially from the anticipated results discussed in these forward-looking statements. The company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available. Our results can be found in the press release and 8-K filings which are available on our website at www.AdvanceAutoParts.com. For planning purposes our second quarter earnings release is scheduled for Wednesday, August 6 after the market close and our quarter conference call is scheduled for the morning of Thursday, August 7. To be notified of future dates of earnings reports you can sign up through the investor relations section on our website. Finally, a replay of this call will be available on our website for one year. Now let me turn the call over to Darren Jackson our President and CEO who will be followed by Elwyn Murray, EVP Customer Development Officer DIY, Jim Wade, EVP Customer Development Officer Commercial and finally Mike Norona, EVP and CFO. Darren.

Darren Jackson

Management

Thanks Judd. Good morning everyone and welcome to our first quarter conference call of 2008. I’m happy to update you on the progress we’ve made on our turnaround during the first quarter. Specifically, I plan to share my observations on the strategy evolution, the leadership changes and provide some tangible examples of progress in our turnaround plan. Finally I plan a real life example of what our company will act like and look like when our turnaround strategies take hold throughout Advance. I wanted to start by personally thanking our Advance and AI team members for their terrific work in Q1 which resulted in a 21% increase in our earnings per share. The top line sales were in line with our expectations while the bottom line was above our plan. The starting point of the results began with the parts sum at last year where we learned directly from our team members on how to accelerate commercial sales. Our 10.6% commercial comparable store sales gain in the quarter was driven by the work and the other steps we took to support our team members as we focused on growing commercial sales. Similarly, our improvement in our cost structure resulted from last year’s efforts. Finally, our team is driven to win in this challenging economic environment. This play to win attitude put us over the top in the first quarter. I’m encouraged by our first quarter results. I’m also realistic that turnarounds by definition will have ups and downs. In Q1 our financial results ran ahead of plan while strategic results were on plan. The 100 plus days of our AAP turnaround is on track from my perspective. The goals in the first 100 days included listening, learning and leading. We made material progress in focusing the organization on our four…

Elwyn Murray

Management

Thank you Darren and good morning. In my time with you I would like to cover three things. First, I will reorient you to how we see the DIY space today. Second, I will share the definition and objectives of our DIY turnaround and transformation plan. Third and finally, I will provide an update on a number of initiatives we have underway now in order to reverse our DIY comp trends. As we have discussed before, we see the DIY industry growing at approximately 1% per year. It is a highly consolidated industry with the top seven players making up 66% of the market. New store growth is exceeding industry growth, leading to negative comps among major competitors. Customer traffic has shown single digit declines over the last several years and while partially offset by increasing sales per transaction has resulted in negative comp trends. All of this information tells us that DIY is in need of a major overhaul. The check engine light has been burning in DIY for several years now and it’s time that we answered the call. I’m very excited about the opportunity to lead our DIY turnaround and transformation and will now provide more insight regarding what this means to us and how we are pursuing this work. We have purposefully both included both the words turnaround and transformation in the definition of our DIY opportunity as there are things we are doing now and over the next 12 months to improve the customer experience and begin turning around our current trends. Additionally, we are focused on transforming the DIY space over the next 12-36 months by identifying and developing distinct value propositions intended to ignite demand by meeting and anticipating changing customer needs in the medium and longer term. Our objectives of this transformation…

Jim Wade

Management

Thank you Elwyn and good morning. I’m pleased to be leading the acceleration of our commercial business as we grow it from less than 3% market share today to a much greater share of the market over the next several years. Also, I’ve never been more excited about our company’s future because we’re reinvigorating it based on our values around our team and our customers that make our customer successful over its long history. We have a great opportunity ahead of us and we control our own destiny in both our DIY and commercial businesses. Before I get too far into the details of where we’re going, I wanted to congratulate our entire store and commercial teams on their 10.6% increase in commercial comp in the first quarter. As you may remember, we committed ourselves to getting back to double digit growth about this time last year. Since then our team has increased the commercial comp consecutively each quarter. In addition to the solid comp, all our key commercial metrics improved, including higher average transaction, increased customer count, higher gross margin percent, increased productivity of our parts pros and delivery fleet and a higher balance of part sales. I’d also like to thank the auto part international team for a strong first quarter in sales and profitability as both their original base of stores as well as the new stores they’ve opened in the last two years performed well. Overall they produced a 14.2% comp for the quarter. As we look forward, we know we have the opportunity to further accelerate our commercial business and take it to a much higher percent of our total sales over the next several years while increasing our profitability as we lever the investments we’ve already made and will be making. We’re pleased but…

Mike Norona

Management

Thanks Jim and good morning. I also would like to personally congratulate and recognize our talented and dedicated team members who positively and passionately impacted our business to deliver the results we saw this quarter. I plan to cover the following topics with you this morning. One, provide an overview of our quarter one results. Two, connect our strategic priorities with our financial measures. And three, provide visibility to some other actions we have taken to improve our long term financial performance. Turning to the first quarter, total revenue increased 4% to $1.53 billion compared with revenue of $1.47 billion in the first quarter last year. This revenue increase reflected the net addition of 141 new stores in the past 12 months and a comp sales increase of 0.6% on top of a 0.7% increase last year. The comp store sales was comprised of a 10.6% increase in commercial sales, including Auto Part International, offset by a 3% decrease in DIY sales. This compares to a 4.2% increase in commercial and a 0.5% decrease in DIY in the first quarter last year. Commercial sales including Auto Part International represented 29% of our total sales compared to 26% last year. For the quarter, our total commercial sales including Auto Part International were $438.7 million, a 14.4% increase over last year. Consistent with the prior year, 82% of our Advance stores had commercial programs. Clearly our commercial teams are leading our company with these fantastic growth numbers, despite a tough economic environment. Our gross profit rate was 48.7% in the first quarter as compared to 48.3% last year which reflects a 39 basis point improvement. The 39 basis point improvement was driven by lower supply chain and logistics costs combined with more effective pricing. SG&A expenses were 39.3% of sales compared to…

Operator

Operator

(Operator instructions) Your first question comes from David Cumberland – Robert W. Baird. David Cumberland – Robert W. Baird: Can you elaborate on the gross margin improvement related to effective pricing? Was that in the DIY or the commercial side and anything else you can add on that?

Mike Norona

Management

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. And I would tell you about 80% of it came from our supply chain and logistics distribution costs.

Elwyn Murray

Management

I’ll share a little perspective from a category point of view on where we saw some nice margin improvement. First of all, 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. And also as we see folks delaying repair and trying to extend performance, things like stop leaks and other again high margin categories have done very well for us. I would also highlight that while commercial sales have certainly grown and overall commercial gross margin is certainly 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. And I guess lastly I would just comment that 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: On the addition of brands, you called out adding a few recently, do you feel like you still have more parts brands that you need to add, particularly on the commercial side?

Elwyn Murray

Management

I would say that the addition of MOOG and Wagner were really 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’re very excited to have those in our stable.

Operator

Operator

Your next question comes from Peter Benedict – Wachovia. Peter Benedict – Wachovia: Last quarter I think you mentioned that Florida had been a drag about 50 basis points in the overall business, any update on how the trends are down in that region?

Darren Jackson

Management

I don’t think we’ve 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’s not true, we’ve seen strength in our commercial business across all of our regions. And it’s probably safe to say even a little stronger in the Southeast. So the way I would think about it is when we look at the balance of sales altogether, you can still clearly see where some of the pockets of challenges are economically, whether it’s because of the housing market, whether it’s because of gas prices. But when you climb underneath and look at where we’re applying efforts against our strategy, even in places like Florida and the Southeast, you can see that it’s working. So we feel good about the fact that we’re doing something different and gaining some market share, even in places where it’s economically a little bit more challenging. Peter Benedict – Wachovia: I know you guys have added some new brands here, have you seen any customer migration, maybe down to private label, to lower price points given the macro environment, is that evident at all, different from the last couple quarters, any comment there?

Darren Jackson

Management

What we can continue to see in the numbers is that in the discretionary items, so let’s just pick one, like tools, that’s going to be DIY side, that continues to be just a little more challenging. And 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. Now as to the actual mix and price points, Elwyn.

Elwyn Murray

Management

We honestly haven’t seen a significant shift. Our private label or house brands have maintained a steady position without a significant upswing.

Operator

Operator

Your next question comes from Dan Wewer – Raymond James. Dan Wewer – Raymond James: You had noted that gross margin rates and commercial have solidified and then further accompanied you had a very nice increase in gross margin rate despite very strong sales in commercial. Darren are we at the point where gross margins in the commercial segment are no longer at a disadvantage to the DIY category?

Darren Jackson

Management

From your lips to God’s ears. So no, structurally the commercial business compared to DIY is lower. And candidly as we look ahead, we think systemically that will always, should never say always but will continue to be the case. But I think as we work through building the relationships with our customers and build let’s say the basket that we’re 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’s fair to say they were up just a little bit. But, because of the growth in the commercial business in relation to DIY, on the overall company margin, clearly it puts some pressure on the overall company margin. And 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’re able to save money and offset that. And that’s the best of all worlds because our customers end up getting the pricing they’re looking for, we’re 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 on main locations and increase the emphasis on the best locations for your commercial customers. How do we square that with the goal of increasing your DIY sales per store 15?

Jim Wade

Management

I think they align well. First of all I would say that our real estate team is making some very good progress in regard to taking a broader view of real estate locations and we’re starting to see some positive impacts already in terms of our occupancy costs. But as we look at our business going forward and we’re looking at where does the site make the most sense to be convenient to both our DIY customer and our garage customer, I think those align well and can reinforce each other as we get the right parts in the stores and have that optimal location. So we don’t see it as a challenge but see it as really an opportunity to align two businesses better.

Darren Jackson

Management

I would add to that it affords the opportunity to potentially in fill more around the [allied] markets and wrap up more of the profit pool.

Operator

Operator

Your next question comes from Colin McGranahan – Sanford Bernstein. Colin McGranahan – Sanford Bernstein: I wanted to dig in a little bit more into the commercial growth, was hoping you could break down that 10.8% comp a little bit just in terms of change in average order volume versus new customers, price versus units to the degree that makes sense and then new programs and how much benefit you had in the comp from new programs and the maturation of those programs versus existing sales programs. Just trying to get a little better sense of where the acceleration is coming from.

Jim Wade

Management

From the standpoint of where did the comp come from, we were pleased to see both our customer count and our average transaction increase. When you look at the two pieces of that, the customer count increase was a little higher than the average transaction increase. As far as price versus units, I think again that basically addresses that, we didn’t see any significant change in pricing strategy during the quarter so it was more about selling more parts which is beneficial to all those metrics that we look at. We really didn’t add any new commercial programs in the quarter of any significance at all, other than just the new stores that we opened last year coming into the comp through the normal process. So when you look at the 10% increase, new locations would only be in stores that we’ve opened the past year that went into the comp during the normal course of business. Colin McGranahan – Sanford Bernstein: Second question on inventory, $125 million increase in hard parts, what are you looking at in terms of net because I know you are taking out some of the slower moving inventory.

Kevin Freeland

Analyst

There’s two impacts there. We have the new MOOG and Warner program that came in that will lift inventories for the year and as well we’re doing the inventory upgrades of $125 million at the same time we’re analyzing slow moving products and working to set up returns through our vendors. I believe the total growth in inventory over the growth in sales is expected to be in the $60-$70 million this year. Colin McGranahan – Sanford Bernstein: For Mike, I understand you just give guidance at the beginning of the year and once a year and the volatility given the turnaround in the environment, trying to get a sense of how much better 1Q was in the bottom line than your initial forecast, because if anything it looks like the compares through the year get easier from here, certainly on the gross margin line and to some degree on the top line as well.

Mike Norona

Management

First of all, as you know we’ve shared the guidance of $2.55 and we’ve also kind of given you a grid of a 1% comp equates to about $0.10 and a 10 basis point in operating margin is equivalent to $0.03. And I would tell you, although we slightly came in better than our plans in the first quarter, as I look at the balance of the year, that grid still holds very true. So I would tell you that we feel good about the guidance we gave at the beginning of the year and as we see the rest of the year playing out. Colin McGranahan – Sanford Bernstein: Do you plan to update that in the second or third quarter or are you going to stick with that $2.55?

Mike Norona

Management

We don’t plan to, I think what we shared with you is this company is focused on the longer term and growing value. The only time I would see us making any more statements is if we saw any material differences and at this particularly juncture we don’t. Colin McGranahan – Sanford Bernstein: The DIY sales increase of 15% per store, it seems like a pretty optimistic goal as it would put your sales per store in the $1.7 to $1.75 million range, it doesn’t look like really anyone does that kind of revenue per box today, so just trying to get a sense of where that 15% increase per store is rooted.

Elwyn Murray

Management

It is a fair question and it is a lofty goal. We do about $1.1 million a year today in DIY and 15% growth if you will over the three to five year window I’m describing gets you to $1.25. So obviously that’s going to require turning around what are currently negative trends and getting that to the positive side. Over the course of that three to five year, you’re still talking about low single digit growth and we recognize it’s going to require both some stop the bleeding with immediate controllable actions but also some transformational thinking around the space in general and that’s the work that I’m going to be leading over the next 100 days.

Operator

Operator

Your next question comes from William Keller – FTN Midwest. William Keller – FTN Midwest: To get back to gross margin you mentioned that the bulk of the improvement was on the lower supply chain and logistics cost. Can you give you a little bit more detail about that given the fuel costs and energy costs right now?

Kevin Freeland

Analyst

One, we actually hedge our fuel purchases on the major portion which is the outbound supply chain between our distribution centers and our stores and it accounts for about 80% of the fuel that we use. So that essentially, the changes in fuel have had a smaller impact on that portion of the supply chain than you would expect. Secondarily, again to comments that Mike made earlier in the call, there were a series of changes that were initiated last year to improve productivity in the distribution centers and what you’re seeing is the impact of those programs this year. William Keller – FTN Midwest: You talked about the inventory increase for fiscal 08 and in the first quarter it looked like working capital came down a bit. I’m wondering if that’s a onetime thing that’ll be offset through the rest of the year or if we can kind of count on that relationship holding for the next few quarters?

Mike Norona

Management

What I would tell you I think Kevin previously answered the inventory question, I think the change that we see is the additional increases in inventory due to the MOOG and Wagner and the parts availability initiative. So, that’s all we see at this particular juncture. William Keller – FTN Midwest: Right but in the first quarter, working capital came down, I’m wondering if that was, if there’s something, a onetime thing in the first quarter, an anomaly of some sort or if that trend of working capital improvement may continue here for the next few quarters.

Darren Jackson

Management

What I’d do is I’d break it into two pieces. One, in the short term, you’re right. Our improvements in working capital and free cash flow, I think our free cash flow was up 43% in the first quarter. We exceeded a little bit of our expectations in the first quarter certainly in terms of free cash flow and in our working capital management. What you’ll see is some pressure in the next couple quarters because MOOG and Wagner are just beginning to flow and just getting the inventory on the shelves is going to put some pressure in terms of our working capital investment. That being said, as we look out longer term, we are just in the day one or two in terms of getting into the longer term work that we’ll be doing in our supply chain. Our longer term work in terms of our space disciplines in the front room and the back room, day one or two in terms of looking at the overall mix in some of the other turn opportunities that we have. So longer term we absolutely see opportunities to keep improving the working capital but I think shorter term and I think Elwyn said it with MOOG and Wagner that we’ve kind of locked on in, probably, I don’t know, certainly not the final two but the two big two that we’re looking to put into our mix of inventory.

Operator

Operator

Your next question comes from Tony Cristello – BB&T Capital Markets. Tony Cristello – BB&T Capital Markets: Darren there’s a tremendous number of initiatives underway and it appears that the majority are geared toward helping the top line growth and overall productivity. Is it fair to assume that most of the cost save initiatives have already been implements and with the goal of now leveraging fixed cost with greater productivity and if that is the case, how much is needs to be accomplished is dependent on your ongoing systems implementations.

Darren Jackson

Management

In any business today you’re never done trying to improve productivity, both on the top line and in the cost structure. It just seemed to make a lot of sense to us is that the right place to get started with, whether you look at our sales per square foot, our profit per team member, the state of our DIY business that our energy was best positioned to start growing this business again. Because when we start growing this business again, a lot of good things happen culturally, a lot of good things happen for our team members in terms of job opportunities and a lot of things happen in terms of creating the environment that we want here at Advance and it’s an environment we enjoyed for many years before I ever got here. And inevitably as a part of just responsible stewardship, there will be cost things that as we get into re-architecting the business model, we’re going to have to continue to be vigilant in terms of finding not just those incremental opportunities in terms of changing our cost structure, but ones that allow us to step change part of that. So organizationally, we’ve been purposeful to position the company to go grow again because we know how to grow and we know what that environment will do for our culture and I was purposeful in my language to say, and we have to get back to the operational excellence that we used to enjoy as a company not so many years ago. And by way of example, we have shrink results in our stores, some of those things run at 0.3 and some of them run well over 1. That’s unacceptable to have that type of variation. And so we’ve got a lot of those type of examples in our company that over the course of the next several years and that doesn’t mean everything is going to take forever, but that we have to just get after in terms of some of the basics around operational excellence. Tony Cristello – BB&T Capital Markets: Would you say that the initiatives on the commercial or the DIY, one is more dependent on being accomplished through systems or is there enough to do right now without relying too heavily on the $30-$40 million you have planned this year, the capital spend you have geared towards systems initiatives.

Darren Jackson

Management

The way to think about it is two frames. One, when you think about the DIY business, what Elwyn, underneath some of the transformation he talked about quick hits. And those are basic things. So it’s attachment selling and we know today and we’re working on tools today, we just launched earlier this week attachment selling scorecards that allow our team members to better see are we helping our customers get all of the things they need, the total solution for whether it’s getting that bake job done or whether it’s getting that tune up job. So every day in every store we can now see tools that allow us to see top to bottom in the company who’s doing the best job of selling the complete solution or the total job to our customer. Today, I’d be honest with you, our weekend scheduling is not where it needs to be and those are things in a DIY environment, if we can strike the right balance of getting the right team members in front of customers on the day that they’re out there, there’s a lot of business in just the basics in order to get that done. I’m very excited about, we’ve started the first, we’re on the 30 days Elwyn and Mike in terms of, we’ve picked 30 stores where we’re beginning to understand customer satisfaction feedback and employee team member feedback as to what we can do different. We’ve got a DIY summit coming in early June where we’re going to bring 20 or 30 of our team members to Roanoke, just like we did with the Parts summit last year and I can’t emphasize enough, last year this team did terrific work engaging our team members in the Parts area and our 10.6% comp today has…

Operator

Operator

Your last question comes from Seth Basham – Credit Suisse. Seth Basham – Credit Suisse: It’s Seth Basham and Gary Balter. First, was there a LIFO credit or charge in the quarter?

Judd Nystrom

Management

What you’ll see is we highlighted the material drivers from a gross profit standpoint and you’ll see that in our press releases where as Mike indicated, 80% of it was supply chain and logistics and 20% of it was pricing. The actual net impact of LIFO and a bunch of other things actually was immaterial in the quarter. Seth Basham – Credit Suisse: As it relates to gross margin, I think in your last quarterly conference call you talked about expectation for modest gross margin improvement over the course of 2008. We saw a pretty good improvement off a relatively tough comparison there. So as you think about the balance of the year, would you expect this type of improvement to continue or would you expect it to come down? And in the context of answering that question, can you remind us really to your fuel purchase hedging. At what price is that hedged and is that throughout the year?

Darren Jackson

Management

On the margin you’re going to have to wait Seth, we’re going to pull out the crystal ball.

Elwyn Murray

Management

Let me go back to maybe what we said at the beginning of the year and I’ll parlay it forward. I think at the beginning of the year we came out of Q4 fairly soft and we forecast out through the year at a zero comp and hence we gave you the number. I think at that time we said we anticipated on a zero comp, we anticipated our margins to be up modestly and our SG&A to be down due to a lower comp. Now we come out of Q1 and our comps are a little higher than we expected, our margins are a little higher than we expected and our SG&A came in around where we thought it would be. As look at the balance of the year, I think those comments still hold and I think one of the reasons we give you that grid, that 1% comp increase, $0.10 and $0.03 is equivalent to 10 basis points improvement in margin is to help you and guide you. But right now, we see those similar trends, those trends continuing as we originally laid out.

Kevin Freeland

Analyst

Essentially what we do is there’s two major fuels costs for the company that the transportation from the DCs to the stores and then the fleet of trucks that we have bringing the product to our commercial customers. What we actually hedge is the diesel for the outbound trucks and it’s not something that we have disclosed or intend to disclose in the future, but it locked in the prevailing prices at the end of last year. We built the budget, set expectations of our earnings based on those assumptions and so on the outbound costs, we’re largely insulated from price moves and it’s something we have done for years. Seth Basham – Credit Suisse: On the inventory investments, some of your competitors have taken a long period of time than you have to decide what inventory to invest in to serve the commercial customer and make parts more available. You’re making a pretty big investment throughout 2008, just trying to get a sense of what gives you the confidence that you are making the right decisions on what categories to invest in?

Elwyn Murray

Management

One thing I will say is you know from really May of 07 through December of last year we got very aggressive and Darren has mentioned some of the feedback from our Parts summit, we acted on a lot of the input from our team. One of the beauties of that was it got a jump start, it was not a perfect science, but what we did do is sit on top of that entire experience with our test and learn, test and control lab store type of science. And we’re able to determine from those roughly 500 stores that we touched where the biggest winners were and why. So we’ve been able to refine that and so as we look at the remaining if you will 2,500 stores, we know precisely where we want to go for the biggest bang and are deploying aggressively against that this year. So some great learning came out of the action we took last year, not to mention the action we took last year we felt was accretive, we’re just going to the most profitable opportunities now quickly.

Mike Norona

Management

Just to clarify, a big part of that inventory increase that we didn’t anticipate would be the addition of MOOG and Wagner, it’s a brand new vendor that is going to play an important part in our future. Whenever you bring a new vendor on side there is an upfront investment to build up your inventory. So that’s a big portion of the increase we see. Seth Basham – Credit Suisse: You talked about four key financial metrics you’re aiming to be a leader in. As you look at your real estate portfolio as it currently stands, would that be limiting to you achieving that goal of being a leader in those metrics?

Jim Wade

Management

I would just say we certainly have to take into account how much real estate we own versus our direct competitors in some of the metrics. But other than that I don’t think there’s anything that prohibits us from getting where we want to be.

Darren Jackson

Management

Wouldn’t you also, what I would add to that is that one of the things that we learned again just paying attention to the customer feedback, when you think about our commercial garages, the thing that’s number one on their list is speed of delivery. And through our real estate strategy and granted it was DIY motivated, but it turns out that some of those main and main locations position us very well with some very important garages as we look across a lot of the markets we participate in. So our advantage in terms of speed of delivery really emanates from that real estate strategy and as we go forward we’re going to have to continue to balance as we add the new stores, how do we take advantage of that and then how do we build on that as we’ve talked about with getting the right parts availability for those very same customers.

Operator

Operator

I would now like to turn the call back to management for any closing comments.

Judd Nystrom

Management

Thank you operator and thanks for our audience for participating in our first quarter earnings conference call. If you have additional questions, please call me, Judd Nystrom at 540-561-8450. Reporters please contact Shelly Whitaker at 540-561-8452. That concludes our call, thank you.