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Advance Auto Parts, Inc. (AAP)

Q3 2009 Earnings Call· Thu, Nov 12, 2009

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Transcript

Operator

Operator

Welcome to the Advance Auto Parts third quarter 2009 conference call. 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

President

Good morning and thank you for joining us on today's call. I would like to remind you that comments today contain forward-looking statements subject to risks and uncertainties that may cause our results to differ materially. The most important of these risks, as well as the reconciliation of any non-GAAP financial measures mentioned on the call with the corresponding GAAP measures are described in our earnings release and our SEC filings. These can be found on our web site at www.advancedautoparts.com. For planning purposes, our fourth quarter earnings release is scheduled for Wednesday, February 17, 2010, after market close and our quarterly conference call is scheduled for the morning of Thursday, February 18, 2010. To be notified of the dates of the future earnings release, 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 CEO. Darren?

Darren Jackson

CEO

Good morning everyone. Welcome to our third quarter conference call. I would like to begin by congratulating the team on another successful quarter. Their focus and their commitment to the customer and our strategy drove our success in the quarter and year-to-date. Let me review with you where we are in our turnaround and transformation work. We are moving into the final stages of the turnaround of Advance. I am very proud of our team members and their ability to drive continuous improvements in our customer satisfaction and team member engagements. Their ability to revitalize our core values and drive our core strategies resulted in our strong top line growth, a 53% in our free cash flow and a 19% EPS improvement versus a year ago. Strategy in its simplest form is the art of making a choice. Our turnaround strategy was principally focused on commercial acceleration and availability excellence to accelerate both growth and profitability. We are pleased with our choice, the results and the long-term potential of that decision. Strategy is also the art of choosing not to do things. Our third quarter results reflect the discipline of making hard choices. Specifically, we accelerated our store closures, cut our investment in DIY including marketing and labor to fund the commercial and availability work. Ideally we could do all things at the same time but that is just not possible. We entered fiscal 2009 focused on investments that would position us to accelerate and rebalance our four wall growth and profitability over the long term. This meant investment more in Parts Pros, labor, parts availability and merchandise capabilities while moderating our level of spend in DIY. Arguably this choice constrained our profitability in the near-term in favor of the long term yet the results of the strategic choices we…

Jimmie Wade

Management

Thank you Darren. Good morning. I would also like to thank our team for another strong quarter. This morning I will update you on our overall sales results along with our progress with our commercial acceleration and DIY transformation strategies. Our total comp sales growth for the third quarter was 4.7% compared to flat comps in the same quarter last year. Our 5.2% comp after adjusting for the calendar shift was slightly higher than the 4.8% comp in the second quarter. Again this quarter we achieved an increase in both customer transactions and average transaction size. We also outgrew the market for the quarter by approximately 300 basis points. Looking at our commercial performance this is our seventh consecutive quarter of double digit growth with an 11.8% increase in comp store sales for the quarter. This increase is on top of a 10.8% comp increase during the third quarter last year. As a result of the comp growth our commercial sales mix as a percent of our total sales increased to 32% towards our goal of 50% or more of our sales in commercial over time. We continue to gain substantial market share in commercial as our double digit growth exceeded the market increase that was in the lower single digits. Even with accelerated growth our market share in the total commercial market of over $40 billion is less than 5% which provides us much room for continued growth. Sales of parts continue to fuel our commercial growth. Parts have increased as a percent of total commercial sales while growth in lower margin commodities was lower and has decreased in overall sales mix versus last year. Our commercial gross margin rates continue to increase driven by increase mix in part sales and better merchandising operational capabilities. Now I would like…

Kevin Freeland

Chief Operating Officer

Thanks Jim and good morning. I would also like to congratulate the team on a great quarter. I will briefly highlight the initiatives that improved our gross profit rates as well as our key focus areas and availability excellence that continue to drive long-term value. During third quarter our gross profit rates increased 190 basis points versus the third quarter last year. This reflects our continued progress in improving our availability of parts, the strengthening and developing of our price optimization and merchandising capabilities, decreasing inventory shrink and improving store execution as a result of the changes to better align team member incentives from the beginning of this year. During the quarter we added two PDQ’s and 25 hub stores. PDQ’s are parts delivered quickly warehouses located in major cities and hub stores serve a neighborhood of stores immediately around them with a standard assortment. We also upgraded the inventories at 389 stores during the quarter, well ahead of our forecast for 250. We were able to re-assort 38% of our planograms using the custom mix tool bringing the total re-assortment to 83% of our planograms year-to-date. With respect to our main distribution centers, we have been working to improve productivity, increase efficiency and ultimately reduce distribution expenses. In order to accomplish this, we have been focused on implementing engineered standards for order collection. I am pleased to announce we have now implemented these changes in all eight of our DC’s. Our work to increase the synergy and collaboration between our inventory and merchandising teams as well as to increase the productivity of our supply chain is paying off. We have been successful in improving our overall parts availability and employing more effective inventory management. We are on track to completely dispose of the slow moving inventory identified in the…

Michael Norona

CFO

Thanks Kevin. Good morning everyone. I would like to start by thanking all of our talented and dedicated team members for the results we achieved in our third quarter. Our team has again delivered a strong financial quarter. I plan to cover the following topics with you this morning; One, provide some financial highlights of our 2009 third quarter. Two, update you on the key financial dimensions of our transformation around growth, profit and value creation. Three, share some insight into how we are thinking about 2010. Overall we are pleased with our third quarter financial results that were primarily driven by the 190 basis point increase in our gross profit rate versus prior year as a result of our continued strategic investments. Our third quarter earnings per diluted share of $0.65 include $0.04 related to store divestitures. Excluding the impact of the store divestitures, our earnings per share were $0.69 versus consensus estimates of $0.57 or a 19% increase from the third quarter of 2008. On a year-to-date basis, our earnings per share have increased 17% on top of a 16% increase in EPS last year excluding the $0.15 impact of store divestitures. Some highlights of the quarter include a 4.7% comp store sales increase comprised of an 11.8% increase in commercial and a 1.7% increase in DIY. On a calendar-adjusted basis our comp store sales increased 5.2%. Our total revenue grew 6.3% during the quarter. During the third quarter our gross profit rate increased 190 basis points versus last year primarily due to continued investments in merchandising capabilities, parts availability, decreased inventory shrink and better store execution. We continue to realize the benefits from the investments we have made over the past year. These investments have allowed us to develop new capabilities to improve our assortment, better execute…

Operator

Operator

(Operator Instructions) The first question comes from the line of Matthew J. Fassler – Goldman Sachs. Matthew J. Fassler – Goldman Sachs: As you think about the balance impact [audio break] in DIY versus commercial, what do you think the impact of the investment will be [audio break] commercial growth? Is that still essentially part of the [audio break]?

Darren Jackson

CEO

You are breaking up my friend. Do you want to try that one more time? I think we got about 1/3 of that question. Matthew J. Fassler – Goldman Sachs: My question was the impact of moderating SG&A investment on your ability to generate double digit commercial sales growth. I know you [inaudible] and the general moderation in investment levels [inaudible] commercial sales momentum.

Darren Jackson

CEO

I think what I heard is how does the moderating of our spending that I shared some of the things we are thinking about for next year and how does that relate to our commercial growth. Is that your question? Matthew J. Fassler – Goldman Sachs: Yes.

Darren Jackson

CEO

We’ll give you an answer and then we will move to the next question.

Kevin Freeland

Chief Operating Officer

Here is how we think about that and I think there are two different things. First of all, the past two years we said are our heaviest investment years in terms of spending as we had to build new capabilities such as our new merchandising systems and as we invested in some of the things in the business we needed to in terms of our four strategies; commercial, availability excellence and those things. As we now anniversary that higher spending we believe we will be able to moderate the growth in terms of our SG&A spend. I think we are still going to invest and we still see opportunities to invest in our business. As it relates to commercial, we will continue to grow our commercial business. We still see a large opportunity with that $40 billion market that is out there and we will continue to invest in that business.

Operator

Operator

The next question comes from the line of Scott Ciccarelli – RBC Capital Markets. Scott Ciccarelli – RBC Capital Markets: I am trying to figure out pace of sales trends. I don’t know if you want to make comments about what you saw during the quarter but we did see a slow down this quarter if we count the two-year stack rate from what we saw in the first half. Can you just comment on what you are seeing in the industry and any changes you might be making to make your sales growth better than what you are seeing broadly in the market?

Darren Jackson

CEO

That is a good question. I would say generally speaking if you look at total market, commercial and DIY together second quarter to third quarter is about the same in terms of total growth rate. In terms of our DIY versus commercial, it is tricky in terms of if we pick on DIY for a minute there are things that are absolutely helping us in terms of unit share in DIY and hurting us in dollar share. Probably the best example we have is batteries. We are seeing continued improvement in unit share as we price the batteries appropriately with the market. We are seeing the benefits with our pricing strategies in margin. The other side of the cost of those strategies and pricing is getting some of our key categories priced right and priced competitively. Sometimes when you look at a two-year stack on stack number you kind of have to back up and ask yourself what are all of the things the company is pursuing? Some of the things we are pursuing, investments in application parts, beefing up that part of our business is clearly showing up in our commercial comps and our commercial market share. Our growth in the third quarter continued to be in terms of share numbers huge. It was consistent with trends we certainly saw in the second quarter. Still overall I think we are going to have these quarters where I think as Mike outlined we will look at overall share trends and we will stack the numbers. The way I would think about it is when you back up and look at holistically at what we are trying to do I feel real good we have less than $500,000 per store invested in inventory and we will lead the industry in terms of sales per store. That will show up in our cash flow statement. That will show up in our sales per square foot going up $10 and some of the market share stuff will be a little off quarter-to-quarter because it is absorbing all of those things that we are trying to make happen holistically in our business. Scott Ciccarelli – RBC Capital Markets: Related to the mix, I know you had invested what is called extra heavy in the second quarter in the commercial side. Took away maybe some advertising labor from the retail side. Do we see any shift in that in the third quarter?

Jimmie Wade

Management

What we have done over this past year is as we did shift some advertising money in the second and third quarter of this year we have been working really hard on what our program needs to look like going forward. Our team here has done that work and we have made some changes. What we have seen so far in regard to our advertising spend is it has been positive. I think as we mentioned in our comments in the fourth quarter we will actually spend about the same as we did last year. I think probably more importantly we think those dollars are going to be considerably more productive than what we spent last year.

Michael Norona

CFO

I want to just remind you we are managing the whole business so when we think about growth we talk about the four walls and one of the things we have shared is we have prioritized growth and returns, our four gauges. In terms of growth we saw our sales per square foot over last year grow by 5% to $217. When you think about the total box and our total business in the third quarter we grew over the rest of the market by 300 basis points. On a year-to-date basis we have outgrown the rest of the market by over 450 basis points. So again thinking about drawing the four walls and the total business.

Operator

Operator

The next question comes from the line of William Truelove – UBS.

William Truelove - UBS

Analyst

I think earlier in the call you said you added about 140 sales people, up about 50%. How close are you to reaching your full-year goal in terms of commercial sales people?

Jimmie Wade

Management

We have been adding the additional sales force as we have been making the additional investment in stores. Just because of the seasonality and how we cycle the work we have done this year we are pretty much currently today where we are going to be at the end of this year. We certainly as we go into next year and we continue to grow commercial we will start to make additional investments as we go into the season. As we have looked at the business from a seasonal standpoint it doesn’t make as much sense productivity wise to make those investments late into the year and in the very first part of next year.

William Truelove - UBS

Analyst

My follow-up question relates to your 2010 preliminary internal planning numbers that you provided. When you said 150 stores, I just want to clarify was that a net addition of stores or gross addition of stores?

Darren Jackson

CEO

That was a gross addition of stores. That includes Auto Part International and Advance Auto Parts stores.

Operator

Operator

The next question comes from the line of Colin McGranahan – Sanford C. Bernstein & Co. Colin McGranahan – Sanford C. Bernstein & Co. : On SG&A let me just throw out kind of a hypothetical and given what the SG&A impact might be. So here in the current quarter the two year average comp was around 2.5%. The comps for all of fiscal 2009 ends up at 5 and the two year stays the same that would imply a comp next year of flat give or take. You may do better than that. Hypothetically if that were to happen can you help us understand what the leverage on incentive comp would be given how that program is structured on absolute comp levels? Either in terms of dollars or rate just to help us kind of dimension and quantify that a little bit?

Michael Norona

CFO

First of all, I think we have shared as much as we can in terms of next year so I am not going to give out leverage ratios and things like that. Let me tell you how our compensation program works at a high level without getting into the details because we don’t disclose that. We changed our bonus program this year, incentive comp to pay stores based on growth which means if they grow over last year you get paid a percentage based on growth. So using an example, if you grew 2% this year over last year you would get paid on that 2% growth. Next year, if you grow at 2% you would expect to see some leverage in terms of SG&A because the dollars, and again we are going to have more stores and more team members so you are going to pay more bonus dollars but in terms of leverage you would expect to see some leverage on the sales. Colin McGranahan – Sanford C. Bernstein & Co. : I think conceptually I understood that. I was hoping for a little bit of help with some dollars around it but if you are not going to provide that, that is fine. On gross margin can you maybe step through this quarter’s gross margin drivers in a little bit more detail in whatever level of comfort you have in quantifying that? I know you mentioned shrink in specific but also [inaudible] capabilities and inventory availability? I have a hard time kind of putting numbers around that stuff or really sometimes even understanding what that is.

Kevin Freeland

Chief Operating Officer

The majority of the change in margin both in the quarter and year-to-date is merchandise margin. So a series of actions we have gone through everything from price optimization to category management as we look through how to manage our relationships with our vendor partners, a favorability in mix as the company is mixing into parts is the majority of essentially the lion’s share of that change. We also saw favorability in terms of shrink and there has been a good story we have been able to tell for a year now but essentially between those two categories that is what has been the story throughout the last four consecutive quarters. Colin McGranahan – Sanford C. Bernstein & Co. : You sounded encouraged that you think there is more opportunity going forward for gross margin expansion. Obviously you anniversary some much more difficult comparisons. What do you think will be the most significant driver going forward as you come up against some of those successes you have already had?

Kevin Freeland

Chief Operating Officer

As we have disclosed in the past, the price optimization today has focused on the front room and we will begin focusing on the back room. It has focused predominately on the retail side of the business and we have work yet to do on the commercial side of the business. The category management and our ability to be competitive in our cost of acquisition of products will continue into next year and then the global sourcing impact will have a very modest impact on our business this year and that will grow in years ahead.

Operator

Operator

The next question comes from the line of Gregory Melich – Morgan Stanley. Gregory Melich – Morgan Stanley: First on the commercial side and then on the finances, on commercial you mentioned you are a third of the way through in terms of having the full program. Could you give us some insight as to how much lift you got in the first 10-20% and what you expect as you do the next 1/3 of the stores full program? Then I had a follow-up for Mike.

Jimmie Wade

Management

We are not certainly in a position to give you specifics with regard to the increases we have seen. I think what we have tried to say is that as we have developed the process we are using to grow our commercial business and we go out into a market and we put in some of the basics within the store in terms of resources and additional sales force resources to go out and attract new customers we have seen a significant increase in our business in those stores. I think as we go into the next couple of years we will continue to see that. I think one of the other positives that we are seeing as well at this point is as we are doing this and adding parts availability and adding additional resources we are starting to see some positive effects on DIY as well in the stores. So we think as we continue to refine the model we are in a position where we can carry out our commercial business and can actually have some synergies on the DIY side as well. So we are excited about that. Gregory Melich – Morgan Stanley: On the commercial side, [inaudible] parts has talked about some selective price reinvestment and that is helping them out in potentially getting back to positive trends by the fourth quarter. How do you see that in the market? Does that have any impact on your slight deceleration in commercial?

Jimmie Wade

Management

No we haven’t seen any significant changes in the market. Certainly different things happen in different markets with pricing in both directions but on an overall basis we haven’t seen anything different and we talked before our primary focus is based on increasing the service levels of those garage customers and show them that we have a part and we can get it to them quickly. We provide them service. When we do that we find that they are certainly willing to pay a reasonable price for that product.

Darren Jackson

CEO

We certainly have seen competitors reacting with price but we wouldn’t want to miss that. I think to Jim’s point we certainly haven’t gone to we have to react with price. You can see it in our quarter in terms of our gross margin this quarter commercial was every bit as good. I think that is just part of making sure that we remain committed to the strategy in terms of the service levels. We continue to build our parts assortment. I think we are on pace to do 1,500 upgrades this year. I think part of that it continues to build over time. I think we exited this quarter going into next quarter that level of consistency I think is worth a lot to us in terms of both the building the relationship with the customer and ultimately translates into the consistency of the growth of that commercial business for us. Colin McGranahan – Sanford C. Bernstein & Co. : On the finance side, we know the importance of trying to get upgraded. What is it the rating agencies are really looking for? What else do you think you really need to do to get that upgrade so you can improve the AP ratio?

Michael Norona

CFO

First of all we are already at investment grade rating in terms of the finances. So just in terms of the technical aspect. When the rating agencies, they look at all kinds of things and that is one of them. They look at the technical things. They look at the business things. Sometimes it is just points of time. Unfortunately those are things we can’t control. However, what we can control is what we are doing. What we have said is we want to get to investment grade. The technical aspects typically the largest thing they look at is the adjusted debt to EBITDAR ratio of which we have set a maximum of 2.5. We are coming in at 2.4 and we see that number getting better. The other aspect and I think maybe the other aspect of your thing is that stopping you from being able to do some of the other aspects? One of the things is we still have the capacity to stay within the 2.5 times and still do other things like buy back shares, like look at great real estate opportunities. It is not hampering us in any means at all. Then as it relates to supply chain financing, clearly one of the big advantages of getting to investment grade is it allows you to tap into more capacity out in the marketplace. That is what some of the banks and other things look at. We see a tremendous opportunity. We continue to see our AP ratio grow and we see a tremendous opportunity there. I think that is one of the benefits of getting to investment grade.

Operator

Operator

The next question comes from the line of David Schick – Stifel Nicolaus. David Schick – Stifel Nicolaus: Let’s go back to sort of the beginning. You talked about we are investing in the Parts Pro truck drivers or any of the stuff you are doing around field execution. You talked about a whole group of things that are being pushed at operations to drive some return. How should we think about your measurements in those? Is it groups that you are measuring groups and can you report some of that? Is there an IRR on specific sleeves of initiatives with all the moving pieces in spend and then you are sort of pointing to an inflection downward in spend? It would be helpful to think about individualized, or at least for me, on ROI on sleeves of these programs if that makes sense. Can you say what Parts Pro’s truck drivers, this is what we are spending and the IRR on that is this year, etc.?

Darren Jackson

CEO

I appreciate where you are going with the question. Here is the way you might think about it. Three levels. Actually you can pull this from the publicly available data and just see our spend to date in relation to our capital investments because that is going to capture both what we are putting in the inventory, how we are managing cleaning up the store base, how we are increasing productivity in our DC’s both Parts Pro’s and everything. If you just look at I think the trailing last 12 months in terms of incremental IRR on our spend, you will see a number that is well over 30 and approaching 40% at the highest level in terms of if you think about a notepad versus the overall change in our capital investment as a company. I think that is pretty good. I think the other way to measure it and I have to take us all the way back to the beginning of time when we said one of the biggest challenges we have as a company is our productivity is unacceptably low. So you can measure productivity to your point in many different ways. Parts Pro’s, commercial sales team members, the inventory we are putting in. You know what, before we got started on this process we were delivering $207 per foot. Today we are delivering $217 because we continue to work the numerator and the denominator. Understandably a lot of focus today is on the numerator. We feel real good about the progress we are making on the numerator and the numerator driver principally has been our commercial sales growth. In terms of the denominator, the capital for the cleanup of the store base, the cleanup of the inventory, the cleanup of all of those things are…

Operator

Operator

The next question comes from the line of Anthony Cristello – BB&T Capital Markets. Anthony Cristello – BB&T Capital Markets: One point of clarification Mike when you discussed the SG&A and how we should look at it for next year I am assuming you are talking about rate of SG&A moderating but not necessarily on a dollar basis. Is that correct?

Michael Norona

CFO

Yes, dollar. So when you think about our dollar growth you guys always remind us that in the first quarter we were going about 14% and I think in Q3 we were growing at about 9.3%. So we are talking about dollar growth. Again, we think about the three buckets, right? We think about fix. We think about investment and we think about variables. Variable will flex up and down. When you think about investment and you think about fix some of the things we invested in this year as we built new capabilities will now become part of fixed next year. So you won’t see in terms of the dollar growth next year. That will moderate.

Darren Jackson

CEO

We are also taking dollars out of fixed that were legacy dollars so we outsourced trust and we outsourced G&A so we have to also continue to drive down legacy costs that are not part of the fixed cost base that need to be with us going forward. Anthony Cristello – BB&T Capital Markets: If you look at the 629 that you had this quarter on SG&A per store, you are basically saying it is not going to go up much more than that as we enter next year?

Darren Jackson

CEO

No. Dollar growth will decelerate. I think we are going to have to balance. You could leave this call right now at 629. We wouldn’t recommend that. What Mike is saying is look we are going to continue to grow that number but we are also going to continue to drive productivity to bring that number down. So to Jim’s point we are 1/3 of the way through the stores, are we going to add more Parts Pro’s? Are we going to add more drivers? Are we going to do that to continue to build essentially having the team members there to serve the customers? As we have said before in those commercial programs an average store probably has the opportunity to do north of 20,000. We are doing below 10,000 today. The difference between those two points in many stores is we have to be there to service the customer. Yes we will have to see parts of the first store go up. On the other hand, in the programs where we already have added we have to go in there and begin to build productivity through perfect order programs and other types of productivity programs. That doesn’t mean shooting people in order to drive up the average order size while we are bringing down the overall cost of doing business. That will continue over time.

Michael Norona

CFO

Just to put a bow on that, you will see our SG&A per store decelerate, the growth decelerate on that. We will share more with you when we give our outlook at the end of our fourth quarter. Anthony Cristello – BB&T Capital Markets: One sort of follow-up as it pertains to that and maybe this is more of a philosophical question for Darren. You made the conscious effort it seems like to pull out resources from DIY. Can you just help me understand how you view the DIY business in terms of where that comp needs to be versus you are obviously pushing growth into the commercial side. Does there come a point where you have to accelerate investment into DIY to maintain that DIY comp or are you comfortable enough that you think you have enough leverage going now that there shouldn’t be any issue with that down the road?

Darren Jackson

CEO

I should probably just clear this up. When we think about the DIY business it is 70% of our business. It is very important to us. When we came into this year and you have watched us for a couple of years now, what we couldn’t figure out to be honest was we were spending a bunch of marketing. We had some productivity numbers in terms of DIY sales and a year ago at this time you heard us saying we are just not seeing the foot traffic, the transactions, the return on those dollars. I think like many businesses you have to make a choice. It wasn’t a choice about abandoning DIY. It was a choice about I have to try and figure out in terms of optimizing where I can put that next dollar in terms of driving the overall productivity of our box. So in the course of a year we have pulled the DIY spend back in marketing principally. We can tell when we have done that we have actually hurt share in terms of where we are going. We replaced the entire marketing team because the return on our advertising was unacceptably low. So in the meantime we took those dollars and we put them into a place where we thought we could make some money. That does not mean we are abandoning DIY. Over the course of this year we have been doing several, and I know you travel our stores, I would just ask you to travel our stores and as you go in next time ask them how the Gas II training is going. It is specifically DIY oriented. Ask them what they are learning from some of the traffic counters we are putting in to help them see conversion rates in…

Operator

Operator

The next question comes from the line of Analyst for Alan Rifkin – Bank of America/Merrill Lynch. Analyst for Alan Rifkin – Bank of America/Merrill Lynch: First, last quarter you had alluded to the fact that your CapEx plan for this year, that 180-200, could be modestly increased based on 105 planned stores but potential for opportunistic purchases. I am just wondering if there are any updates to your CapEx figure or your store plan?

Michael Norona

CFO

Let me give you just a high level. We anticipate we are going to be in a range of $200 million this year. Analyst for Alan Rifkin – Bank of America/Merrill Lynch: I guess that 105 stores is still a good number at this point?

Michael Norona

CFO

Yes, that is the gross number. Analyst for Alan Rifkin – Bank of America/Merrill Lynch: Going back to Tony’s question on the DIY focus, while you have made it clear you are certainly still the opportunities are still there and you will continue to certainly focus on the business over time, just wondering if you have seen any trends whether it be third quarter or even prior to that whether it be by geography or a monthly basis to help better target your initiatives on a go-forward basis?

Jimmie Wade

Management

I think in terms of what we are doing internally we certainly are feeling positive about the things we are seeing happen. That doesn’t turn into a forecast but some of the things we have talked about already and the changes we made in advertising and marketing and the initial results we are seeing are positive. A number of the merchandising related things the team is leading are showing positive signs. The staffing initiatives, the parts additions and I could go on. I think the hard work we are doing on the DIY business and I would say building on Darren’s comments, we are not at the same place in DIY today that we are in commercial. We have got some time to make up and I think that is what you are seeing in the business. The work is going on behind the scenes. We have got some really talented people doing it and we feel positive about what we see as we go forward.

Darren Jackson

CEO

Maybe just to finalize that, absolutely our most recent marketing tests are very encouraging. Very encouraging in terms of what we are seeing in terms of results in market share. As the third quarter played out it got in terms of the marketing results just got better. The other thing that is encouraging too is our parts business in DIY. Part of that is economy but one of the things for context is you have to go back three years and the truth is three years ago our DIY business had a very strong DIY non-application, arguably the leadership here had a view they were competing against Wal-Mart. You know what, we may have lost a little bit of brand equity in terms of the parts business with some of the core DIY customers. Over the course, and I think Jim said this and it is a nice result, as we are rolling out the commercial programs, rolling out the parts programs, using custom mix to get the right assortment, the upgrade of our merchandising capabilities led by Charles Tyson, in that whole parts area is very encouraging and to be honest I think we were working ourselves out of a little bit of a hole in terms of perception around DIY parts. I think like many things you have to re-earn the customer’s trust in that space. Many of the customers that show up in our stores are very smart. They are focused and they understand the parts business. Our team members understand it and rebuilding that trust is something that doesn’t happen necessarily in a month or a quarter and it happens over time. I would say that is underneath an encouraging trend we are seeing in terms of our parts business in DIY as well.

Operator

Operator

At this time I would like to turn the call back over to management for any final comments.

Judd Nystrom

President

Thank you operator and thanks to our audience for participating on our third quarter earnings conference call. If you have additional questions please contact Joshua Moore at 952-715-5076. Reporters please contact Shelly Whittaker at 540-561-8452. That concludes our call.

Operator

Operator

Thank you. That concludes our call today. You may now disconnect. Thank you for joining us.