Welcome to the Advance Auto Parts Third Quarter 2014 Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. Before we begin, Zaheed Mawani, Vice President of Investor Relations, will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning, and thank you for joining us on today's call. I would like to remind you that our comments today contain forward-looking statements we intend to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address future events, developments or results and typically use words such as believe, anticipate, expect, intend, will, plan, forecast, outlook or estimate, and are subject to risks, uncertainties and assumptions that may cause our results to differ materially. Our comments today will also include certain non-GAAP measures, including certain financial measures reported on a comparable basis to exclude impacts of costs that were incurred in fiscal 2014 in connection with the integration of General Parts International and B.W.P. Distributors. Please refer to our earnings press release and accompanying financial statements issued today for important information and additional detail regarding these forward-looking statements and the reconciliation of the non-GAAP measures referenced in today's call. 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. For planning purposes, our fourth quarter 2014 earnings release is scheduled for February 12, 2015, before market open, and our quarterly conference call is scheduled for the morning of Thursday, February 12, 2015. To be notified of the dates of future earnings reports, you can sign up through the Investor Relations section of our website. Finally, a replay of this call will be available on our website for 1 year. Now let me turn the call over to Darren Jackson, our Chief Executive Officer. Darren?

Thanks, Zaheed. Good morning, everyone. Thank you for joining us, and welcome to our third quarter conference call. I'd like to start off by thanking all of our team members for their hard work and commitment to better serve our customers and grow our business. Joining me on the call today is our President, George Sherman, who will update you on our business operations; and Mike Norona, our Chief Financial Officer, who will update you on our financial performance. Our third quarter objectives remained unchanged as we continued to focus on the consistency of our base business and successfully integrating General Parts. Overall, we are satisfied with our progress in the quarter and continue to be on track in terms of the base business objectives, the integration milestones and our financial performance. Our team members remained focused on our 3 outcomes: sales, service and profit and continued to drive improvement into the business. Our total sales grew 50.6% in the quarter compared to the third quarter of 2013, primarily as a result of the acquisition of General Parts, new store openings and our comparable stores sales increase of 1.5% in the quarter. Our third quarter comparable cash earnings per share of $1.89 increased 27.7% versus our third quarter last year, driven principally again by the acquisition of General Parts as well as our base business performance. Despite an overall cooler summer season, we were very pleased to have delivered solid comparable store gains in commercial, with our DIY business experiencing some unevenness in sales trends driven by lower volume of seasonal categories. The consistent strength of our Commercial Business was seen throughout our North American operations, including Advance Auto Parts, CARQUEST and the WORLDPAC locations. This is encouraging, considering our teams have come together in less than a year to…

Thanks, Darren, and good morning, everyone. First, I'd like to thank all of our team members for their contributions to customer service in the quarter and doing all the right things to show our customers that we put them first. At the heart of executional excellence is customer service, and our team members drove our success this quarter through their commitment to the customer. With my prepared remarks this morning, I'll provide a view on our third quarter business performance, followed by a business update including key priorities within the quarter. Looking at sales, we are satisfied with our performance in the third quarter as the team delivered a comp store sales outcome of 1.5%. Our positive sales performance was led by strong performance in our Commercial Business and good execution by our field, merchant and supply chain teams. Our solid comp sales performance in our Commercial Business was driven by our Northeast market leading the way, followed by our Great Lakes and Midsouth markets, and benefiting overall from both transactional and ticket growth in the quarter. Our B2B business continues to perform very well and continues to grow. We continue to make good progress with integration of our Advance and CARQUEST commercial service programs by adding CARQUEST Technical Institute and TechNet customers to the Advance value proposition while adding Motoshop customers to the CARQUEST tool belt. The key with these programs is migrating and evolving the relationship with our commercial customer from one that is strictly transactional to one that is helping them grow their business and helping them be more successful, a greater sense of partnership and long-term loyalty that is a two-way street. This is another aspect of the integration that is immediately enhancing our base business. Turning to our DIY business. As referenced earlier, our DIY…

Thanks, George, and good morning, everyone. I'd like to start by thanking all of our talented and dedicated team members for their commitment to serving our customers in the quarter and helping our company again deliver strong financial performance in our third quarter. I plan to cover the following topics with you this morning: one, provide some financial highlights from our third quarter of 2014; two, put our third quarter results into context with our expectations and key financial priorities that we use to measure our performance; and three, provide some insights on the remainder of 2014 and how we are thinking about 2015. Before I begin my remarks about the quarter, I would like to remind everyone that unless otherwise specified, Advance will present its financials and supporting commentary on a consolidated enterprise basis and will also discuss results on a comparable basis, which excludes the impacts of onetime integration expenses related to the acquisition of both General Parts and BWP, along with any amounts related to the amortization of intangible assets resulting from the acquisition of General Parts. Also to serve as a reminder and as mentioned on our previous earnings calls this year, we refer to a conformity reclassification of supply chain costs from SG&A to gross profit and would like to reiterate this reclass continues to apply to these third quarter results and will also apply to the remaining fourth quarter of 2014. For the third quarter specifically, this reclassification was approximately 95 basis points, and year-to-date, this reclassification impact has been 85 basis points. Moving on now to our third quarter operating results. We are pleased to report a third quarter comparable cash EPS of $1.89, a 27.7% increase from our third quarter in 2013. Included in our comparable cash EPS results in the quarter…

[Operator Instructions] The first question today is from Michael Lasser with UBS.

On the comp result within the AAP business, if we look at a multiyear stack basis, it did decelerate a bit this quarter despite having more inventory across the company and more inventory availability through some of the cross-sourcing. Recognizing that DIY was a little choppier, maybe you can give us some more detail on what drove the deceleration this quarter.

Michael, you said it. When I look at the quarter and I look across North America, our West Coast locations, principally WORLDPAC, were closer to double digit. Our Canadian locations were closer to double digit. CARQUEST, we talked about the core CARQUEST-owned locations, that we talked about in our conference call script. AAP maintained its trends in its Commercial comp business. And DIY was the one -- we started slow and we signaled that at the beginning of the second quarter. And it was uneven. It strengthened throughout the quarter. It was principally seasonal categories. I think when you put it all into context -- and again, you could -- if you parse out our AI business was -- AI-owned locations, those were closer to flat. So that tends to drag on the core AAP comp overall. And so when I look at it, we continue -- and George, you may have a couple of comments on this, just the DIY plagued us this quarter a little bit in its unevenness. And for us, that's actually not a new story. What was encouraging is it did strengthen over the course of the quarter. Would you add anything?

Yes, not much to add, Darren. I think you said the key themes. It started early on at the very beginning of Q3, and we sequentially improved our comps throughout the quarter. And our business got stronger, including in DIY. The Commercial results were good throughout the quarter, and we remain very, very confident in our ability to execute our new Commercial value prop and get stronger there.

Okay. That's very helpful. And then my follow-up is it looks like you got about $13 million of gross margin synergies for the quarter. As you look forward, is that a realistic number that we can think about as a run rate? Or is there -- are you going to see a disproportionate benefit from the gross margin -- some of the purchasing stuff at the beginning, and then that's going to tail off over time?

Yes, so it's Mike. You're right. We were just a tad over $13.3 million in terms of our gross margin benefits. It was about 58 basis points in the quarter. And I think what we said at the end of our second quarter is we expected quarter 4 to have a little bit more purchasing coming in. So we would expect that number to continue to be strong in the fourth quarter. We haven't broke out SG&A. We've talked about our synergy number. And I think what I would tell you on synergies is we expect our -- we expect to be at the high end of our synergy range that we've given you for the year, and a bigger portion of that will be our purchasing benefits.

The next question is from Greg Melich with Evercore ISI.

I want to see how we're doing on the closing stores, so the incremental 30 stores, what sort of sales transfer rate we were able to achieve in the quarter? And then the follow-up would be, I know you talked about supply chain and some of the big changes there. Do we have the plan yet as to how many DCs will ultimately be consolidated or shifted? Or when should we expect that plan?

Greg, it's George. I think in the consolidation stores, they're very much in line with our expectations. So as we begin to consolidate stores, the sales are transferring over at the rate that we expected. There is a bit of impact to other stores where, when you're moving commercial customers and commercial accounts, they sometimes go to Strom [ph] and CARQUEST stores initially, and will ultimately make their way to the Advance store, but very much where we expected it to be. On the distribution center side, I'm just going to repeat where we've gone in the past on that one. Our logistics network optimization work is winding down. We are beginning to execute on that plan. But in terms of DC consolidations or closures, we'll communicate those internally first and we'll go from there.

Yes, and just to remind you, Greg, these first 100, both in terms of principally sales productivity, they were at the low end of the band. And if we don't transfer any sales, we'll still make a little bit of money. I mean, these were stores that, by and large, were borderline stores that we had to make a decision whether you'd close it or not. And again, part of it is these are going to be done at scale over the next couple of years, and with the teams learning their way through, how do you successfully transfer team members, transfer customers. And so what we're looking to achieve -- as George said, we're right on track. And matter of fact, we've learned a few things in terms of this first group of stores in terms of the transition of customers that will help as we go through the balance of the store transitions in the next few years.

Could you remind us of the expectation? Was it 70%?

Well, I think I got in trouble last time, to be honest, because I said some of them are over 100. And that's a true statement when we create capacity and service levels. So some of them, we're seeing over 100. What we said in BWP is that if we get 60% to 70%, we feel really good about where we are. And as George said, we're on track with those numbers. I just don't want people to run away and assume that these first 100 are actually at the same productivity as the average of the chain.

The next question is from Scot Ciccarelli with RBC Capital Markets.

Can you talk about both the opportunities as well as the potential risks here related to some of the merchandising and product changes that you're making in the stores?

Sure, Scot. I think just starting off with the opportunity side, we think we have a great opportunity to put together a just fantastic house of brands. So when you look of the go-forward position of the combined CARQUEST-Advance entity, we've done some of that work already. We've introduced Monroe to the Canadian market, and we've seen some very nice results from that and are very, very pleased with the way that, that went. I think the risk side is this integration is hard work. And for the first year or so, we've done a very good job of separating integration rhythms and run the business rhythms. But ultimately, the manifestation of most of the work that we do in the integration shows up on the phone, in the shop or in the store, and that's happening now. So we are in the physical portion of the product hierarchy work, actually relabeling in stores. And we've -- we're happy with the early results on that one, and we think that we've mitigated risk in terms of any kind of distraction to the team.

Yes, Scot, the only thing I'd add is that our team members, they get excited about selling premium products and commercial-grade products. And when they have the focus on these changeovers, as George said, in our Canadian business, when they have a level excitement about it, they get their customers excited. And we've seen good results, albeit we're into the very first inning on some of these product changeovers. And so I think the opportunity for us, when it's all done, is across not just the 5,200 owned stores but including the independents, we're going to have a consistency of product offerings that really will be commercially led in terms of our Advance organization. They're very excited about the CARQUEST-branded products coming. They're very excited about some of the new brands that are coming. Let's say in terms of the CARQUEST organization, they're glad to see some of those brands come back. Some of them, they've had before. And I was with some independents in Las Vegas, and we're having great success in terms of the initial transition of some of those products. I'll tell you what the risk is, is that you're going to be reboxing, relabeling and repositioning, which is all activity, and those are activity in our stores. And what we have to balance in 2015, I mean we'll be a broken record on this, we got to get the product right and we have to get the people right. When we get product and people right, our business tends to work. And so that intensity of making sure that the excitement of new products, balanced by the reality of the work to get them in, doesn't end up disrupting our relationships with customers and take our eye off the ball in terms of the base business.

Got it. That's very helpful. And then just a quick clarification. When you guys talk about strength in Commercial, I know you guys don't break out specific comps, but can we assume that's kind of a mid-single-digit number? That's how you would think of "strength?"

Well, we would think at least a mid-single-digit number constitutes strength.

The next question is from Matthew Fassler with Goldman Sachs.

Two quick ones. First of all, from your commentary on DIY, it sounds like your DIY comps, probably on the whole for the third quarter, was below the second quarter level. Can you tell us how the third quarter Commercial comp compared to the second quarter Commercial comp?

Yes, so you're right, Matt. Our DIY comp was the principal driver of taking down the overall comp, and it was below the second quarter. In the third quarter, it was in line with the second quarter overall.

So then -- Commercial then you're saying was in line?

In line.

Okay. And then second question, if you could just give us an update as to what you're seeing with your work on daily delivery and how those stores are faring and the impact that you're seeing on sales momentum, inventory utilization, et cetera?

Yes, Matt, it's George. We continue to be pleased with our daily delivery stores in terms of the overall sales results. I think if you look at the domino effect of that, what it will ultimately do is allow us to pull back in our maxis at store level and increase our SKU coverage inside the store. So that's kind of the work in progress and the work ahead of us. Most of our attention on daily delivery has turned to our Hartford DC. That began receiving in Q3, ships in Q4 and is going to have a pretty significant ramp up. So that is our next big footprint in the Northeast in terms of daily delivery, is opening up Hartford.

And George, now that you're deeper into Indianapolis and the work that you've done, any quantification of the benefit to a market when you make this change?

Yes. Matt, this is Darren. I think if you go back to what we've said publicly is that if we see -- initially, if we said a 3% lift in terms of the market relative to the control stores, then we're in good shape. We've been exceeding that, so we're very pleased with it. And as George said, Hartford I think opens up next week in terms of the business, and we think that will be real helpful for that Northeast part of our business.

And that benefit, just my final follow-up, that benefit comes primarily on the Commercial side?

It actually comes on both. It's more pronounced on the Commercial side, but we're seeing it on both sides of the business.

The next question is from Michael Baker with Deutsche Bank.

I wanted to ask you about the program where you're putting the WORLDPAC products in 3,000 Advance auto stores. Can you discuss any early results there? What kind of comp lift you see in those stores? And I guess a follow-up to that, is that part of the broader re-merchandising that you're talking about for 2015?

Yes. Do you want to do it, George?

Yes, it's not part of the re-merchandising for 2015. It is simply an inherent benefit of our new enterprise. When we say 3,000 stores, please understand that's a rolling number. So some have been on it for a week or 2, and some have been on it for a couple of months. Where we see the benefit again, as we said in the script, is just saying yes to customers. And obviously, it gives us a level of import authority that we love having in our stores. So it's great from a cost standpoint in that we're looking with inside the company versus outside to second source, and another good reason to say yes, but it's not part of that overall assortment.

Yes.

And I guess in the ones that have had -- the stores that have had that program I mean, is there a measurable lift to the same-store sales in those stores?

Here's what I would say, Michael. The lift that we're seeing in there, I wouldn't run out and put an extra point of comp in your model. And the reason I say that is it takes time. So in order to get access to the product, what you're doing is putting the system in the store called speedDIAL, that speedDIAL product gives you visibility into WORLDPAC warehouses that are around our locations. And what has to happen over time is that it's not an on-off switch. The customers, just the general repair customers, they're generally working on a lot of domestic vehicles, a lot of import/Asian vehicles, some European vehicles. WORLDPAC's strength tends to be across all of import, principally European. And so those general repair shops first have to understand you have it. And then second, they have to get comfortable in terms of ordering it from you, and you build that business over time. It's not a light switch business. What it does for the Advance stores principally, and we saw this with the CARQUEST stores, it builds commercial credibility, is that part of our value proposition at Advance over time has really been this evolution from the perception of retail to the reality of being a commercial provider. So it's one more thing that gives us commercial consistency and credibility, and more than anything else helps us sell the balance of the products in the portfolio in those stores.

That makes sense. If I could just jump on a little more short-term issue. Just on the comps, you said business got better throughout the quarter. Do you look at that on a stacked basis? Was it better even on a stacked basis? And then -- you've given us some good granularity on the comps, I am wondering if you could tell us a fourth quarter expectation. I mean, do you expect comps to be positive against a tougher comparison?

Yes, I would say this, Mike, is that -- and this is a line George uses internally, is that we're pleased with our positive comp performance, but we're not satisfied. We'd be disappointed with comps that weren't positive. And so as we look at the fourth quarter, yes, it gets a little bit more difficult, principally right at the end of the quarter is when the cold weather really came into the business. And predicting that, we're just not in that business as to how the weather is going to be at the very end of the quarter. Our expectations with our teams and our goals for the teams are absolutely positive comps.

The next question is from Seth Basham with Wedbush Securities.

My first question is looking at gross margins and the core business. If you try to exclude the synergies that you guys achieved this quarter, how are gross margins for that core business?

Hey, Seth, it's Mike. So if you remember at the beginning of the year, we kind of gave you a range of, last year if you put these businesses together, in the range of 45.5 to 46. And we said that we expected the gross margins to be up modestly on the year. If you look at a year-to-date basis, and again, if you take that 45.4% number that we are year-to-date and you back out the supply chain reclass of about 85 basis points and the year-to-date synergies of about 48, we're modestly above that number. And the big drivers of that obviously are we've mixed in more commercial, and there's some good stories to that. Obviously, our national accounts are growing, so we're mixing in more of that. Some of the categories like tools and equipment are growing a little bit lower gross margin, so we expected some of that mix. So year-to-date, we feel good about the gross margin. And then obviously, over time, as our merchandising capabilities kick in, our global sourcing capabilities kick in, we expect that we will see some upside there. In the quarter, the average for the quarter was slightly below what our year-to-date was. So I think we came in at a 45.2%. There's a little bit of -- there's a little bit of noise in there from some inventory growth at AAP last year. In Q3 last year, I think our inventory grew about 12.3%. This year, it grew about 8.3%, so that's a little bit of a headwind. We got a little bit more supply chain cost this year caused by some of the daily replenishment. Hartford, we're starting to receive there. And then the last little bit of headwind we faced is whenever the DIY, we experience a little bit of softness in DIY, obviously, that impacts our gross profit rate. But in general, we're pretty well right on plan to where we expected to be from a gross margin perspective.

Got it. And then my follow-up is just around AI. Can you give us some sense of what your plans are for that business in the future? Are you planning on closing the stores, consolidating them? How do we think about that?

Yes, well, our AI business, what are we, 200 stores now team in terms of that business. We have a lot to say grace over right now. And so what we've been doing with AI at this point is we have slowed their growth. And like last year, I think we added a few stores in the Panhandle last year.

We did. We closed -- consolidated some of the Panhandle, just as will again this year in North Florida. We'll look for ways to optimize the profitability of AI in their overall business results. And we understand it's a long distribution channel to come from Massachusetts to Florida for that brand. And the product mix changes pretty drastically when you move down to the southeastern part of the country, where AI really built a business around some great undercarriage categories in areas like exhaust, where they're very strong. So the mix tends to change.

Yes. And I'd say, you asked how we're thinking about it as we look out, I'll tell you one of the things that we see is that we have our WORLDPAC team working with our AI team. WORLDPAC's coverage in North America allows us to take some of that AI product, and we're doing this without giving away competitive markets right now. We see the opportunity to leverage some of their private label premium product categories into markets where we're not overlapped. And so we've asked that team to kind of build out the blueprint in terms of how do you get more leverage on the AI product brand through WORLDPAC in select markets.

Our final question today is from Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: There's a lot of questions on what's going on in Florida broadly right now with one of your big competitors pushing into that market. So can you talk about your delivery capabilities as they are now, what they will be and what they were prior and from a daily delivery perspective? And any comments on the performance of that market overall would be helpful.

Yes. Chris, when you helicopter up, overall, I think what we would say -- in our conference call we highlighted the markets that were real standouts. But we were pleased generally across all of our footprint, particularly with our Commercial Business. When you get into Florida, you could pick Florida, you could pick other parts of the country. We have competition showing up everywhere. And where we've positioned Florida in terms of daily replenishment is that -- principally in that Orlando market, Tampa market, parts of the northern Panhandle, we're using a manual type of process, increased to daily replenishment in those stores. It's not the most cost-effective way to do it, so over time we'll double back and improve kind of the system and processes to get that done. We see an opportunity to extend that all the way to markets like Miami, too. So we're working through that as we go forward. At this point, overall, we recognize -- I mean, it's like us going into Dallas. We see markets where we're understored. We expect our competition to see markets where they are understored and just keep growing. We know from history that tends to actually put pressure principally on the DIY business. Because you're taking a business that is essentially a very low grower and just splitting it amongst locations. And customers tend to go to stores that are closest to them in that business. And so if your question, are we feeling some of that pain when competition comes in? Yes. Is that new? No. We see that generally. And similarly in markets where we go in, I imagine you'd ask our competitors if they see the same thing and they would likely say, "Yes, we do." And so we've prepared for it. We knew it was coming. And so now we just have to manage our way through it. We've done this in Atlanta, Chicago and many other markets. So we've seen it before. It's roughly a 2-year type of cycle and then we work our way through it. Anything else, George?

Yes, the daily delivery in Tampa and Orlando is new this year. It's something that we did in preparation for more of a competitive environment in Florida. And we'd naturally like to get that throughout the state. But as you look at Miami, it's some of our absolute best hub and super hub network build-out, and we're very, very pleased with our parts availability in that market. So will we get there with daily delivery? Yes, we will eventually as a matter of natural pacing. But we like our parts availability in Florida. Christopher Horvers - JP Morgan Chase & Co, Research Division: And then -- and so in the core AAP stores, what percentage of the stores or number of stores have daily delivery currently?

Oh, we're probably -- what, almost 600 stores, George?

Yes, right in that ballpark or so. Christopher Horvers - JP Morgan Chase & Co, Research Division: And then Hartford will add how many more?

Well, Hartford over time, eventually, up to 400. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. And then just an accounting question for Mike. As you think about the incentive comp pressure that you saw in the third quarter, any quantification there would be great. And with the 53rd week, how does that impact your margin structure? Where does more of the leverage come through in that '15, '16, '17 sense?

Yes, so the -- I'll do your 53rd week. That's an estimate for us and quite frankly, it's a challenging one because it -- that 53rd week comes right at the beginning of the year, and you just never know what the weather is going to be. I almost wish it was in the middle of the year because there's less volatility the middle of the year than there is at the end of the year. But it's just -- it's projecting some sales. It's projecting a gross profit margin rate and it's projecting SG&A, variable SG&A and a fixed portion -- fixed allocation, so it's nothing more than that. And that's our best estimate. And the good news is it's a nice comparable week, so I don't think it will any impact, plus or minus, to how we think about the quarter or the outlook we've given. Obviously, our outlook does not include the 53rd week. And then in terms of your second question was incentive comp. The comment in the script was really designed about the year-over-year. Last year, I think we did a minus 2 comp. This year, we did a 1.5 comp. We pay our team members, from whether you're a General Manager or whether you're the CEO, to grow our sales and to grow our profits. And we did a better job this quarter versus last quarter -- sorry, versus last year Q3. And that's why we saw a little bit more incentive comp. So that's what the comment relates to.

Yes, principally, at store level.

At store level, yes.

Thank you. And that does conclude the question-and-answer session. I would like to turn the call back over to Zaheed Mawani for any final comments.

Great. Thanks, Wendy, and thanks to our audience for participating in our third quarter earnings conference call. If you have any additional questions, please call me at (952) 715-5097. Reporters, please call Shelly Whitaker at (540) 561-8452. And that concludes our call.