Good morning. My name is Chantelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2010 O'Reilly Conference Call. [Operator Instructions] And now I would like to turn the call over to Mr. Tom McFall, Chief Financial Officer. Sir, you may begin.

Thank you, Chantelle. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement. The company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contained within this conference call that are not historical facts are forward-looking statements such as statements discussing, among other things, expected growth, store development, integration and business strategies, expansion strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions that are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, including the acquisition of CSK Auto Corp., weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors section of the company's Form 10-K for the year ended December 31, 2009, for more details. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to our second quarter conference call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Ted Wise, our Chief Operating Officer. I'd like to start off by congratulating Team O’Reilly on the outstanding second quarter results. Our solid performance and continued success across the 38 states in which we do business is the result of the commitment each of you has made to our culture values. Embracing these values has been the bedrock of our company's phenomenal growth over the years, and it's so encouraging to see that the way we do business continues to be so successfully ingrained in our stores and distribution centers across all markets. I strongly believe that we offer the very best service levels in our business and want to thank all of you for your hard work and dedication to the company's continued success. Before moving on to the discussion of our operational performance during the quarter, I want to comment on the $15 million reserve we accrued in the second quarter to potentially fund settlement and related costs of the investigation of CSK Auto being performed by the United States Department of Justice. This investigation is related to the alleged wrongdoings at CSK Auto in 2006 and prior. As most of you know, we didn't purchase the company until July of 2008. Part of our due diligence process prior to this purchase was, of course, evaluating the exposure the company could have related to the alleged issues. After extensive work, we reached the conclusion that the actions of the Department of Justice and the Securities and Exchange Commission would most likely stop short of penalizing or charging CSK based on the level of cooperation with the SEC…

Thanks, Greg, and good morning, everyone. Let me also start by saying thanks to our team for the sales and profit growth that O'Reilly accomplished in the second quarter. While much of our attention in the corporate office has and continues to be on the CSK to O’Reilly transition, the core O'Reilly's store operations, sales teams and distribution group are totally focused on our customers and managing our profitability. The results are very evident in last quarter's 7.9% comp sales growth and the increase in our operating margin to 14.2%. During the last couple of years leading up to the purchase of CSK, several new tools and systems had been implemented in the stores and DCs. Our new store-scheduling system, our store-based computer training, electronic sales call tracking, regional installer pricing and voice pick in the DCs are some of the key initiatives that have enabled our stores and DCs better and more efficiently service the customer. Of course, we know that key to our growth and success is the culture and the dedication of our team members. It's important that we also acknowledge all the team members from the core O'Reilly's stores who have been involved in the training for the CSK to O'Reilly store computer conversions and store resets. We have had thousands of team members volunteer and spend weeks at a time away from their families to help in these conversions. Needless to say, we couldn't have physically done it without them, and it has been an important part of replicating the O'Reilly culture out West to our new team members. Prior to discussing the CSK conversions, I would like to quickly update everyone on our second quarter expansion results. Our total store count increased to 3,492 with the addition of 24 new store locations. We closed…

Thanks, Ted. Now I'll move on to the numbers. For the quarter, sales increased to $130 million, 10% over the prior year to $1.38 billion. The increase was attributable to a $97 million increase in comp store sales, a $32 million increase in non-comp new store sales and a $1 million increase in non-comp non-store sales. For the quarter, ticket average and ticket count contributed equally to our comparable store sales increase. The increase in the ticket average was driven mainly by mix. The sales of hard parts, which typically carry our higher ticket accounted for a larger portion of the overall sales volume. For 2010, our total revenue guidance remains at $5.2 billion to $5.3 billion. Gross profit was 48.7% of sales for the quarter versus 48.2% in the prior year. The 45 basis point improvement was driven by improved acquisition costs, more favorable product mix and decreasing at the stores converted to the O'Reilly POS system, which provides more robust tools for managers to control shrink. These improvements were in part offset by de-leverage on distribution costs, which is the result of the new distribution centers coming online and consistent with our expectations. Year-to-date gross profit stands at 48.5% of sales. For the full fiscal year, we continue to estimate gross profit as percent of sales will be 48.1% to 48.4% of sales. While we've been very successful in growing the Commercial business, which typically carry a lower gross margin percent, the shift in mix of sales to more hard parts has helped us maintain our margins, and we now expect to be in the upper end of our guidance range. SG&A for the quarter was 34.5% of sales versus 36.3% in the prior year. The leverage on SG&A was the result of strong comparable store sales. On…

[Operator Instructions] And your first question will come from the line of Gary Balter with Crédit Suisse. Gary Balter - Crédit Suisse AG: The question is your stock is in this position now where people are saying, "Hey, you've had really strong results to date. But now, it's tougher comparison." We look at it and say you're just starting off some of these conversions and there's so much opportunity to go forward as you convert. I'm not asking you to detail out Seattle, but could you kind of walk us through how, if you went back, because that's your oldest one, kind of how the process works? You make the change. How long does it take until you really start having a penetration with the customers? And then in your mind, is this a multi-year process? Is this like one big year of catch-up, and then it's back to regular comps?

Gary, my opinion is that it takes time and it happens incrementally. The commercial customers in every market or at least we've not found any that were really underserved, most commercial customers have a supplier that's doing a reasonably good job. Our effort once we convert is to go out and convince those customers that we can do a better job, and you don't get that opportunity, first try. And sometimes that opportunity happens incrementally and over time, and that's probably the case most of the time. And in this case, we're working varying stores to new systems, new product lines, new methods of inventory availability, the need to look up parts and paper catalogs for heavy-duty applications and a variety of things that have been the nature of the more traditional aftermarket for years. My comment would be that this is a multi-year process. But we immediately get pretty good results following the conversion once everyone gets used to the systems and so forth. It's just by virtue of the inventory availability. But for us to fully maximize this opportunity, it's a multi-year process.

Gary, this is Ted. You also remember that stores are really doing a nice retail volume to start with too. So it's going to be a growing process in that store to build the right team to go after the Wholesale business. And as Greg mentioned, they're being taken care of by someone now. And since it is a relationship basis, sometimes the best business takes a little longer to earn because you want to make sure you can keep it.

And then something else I want to add, Gary, is that once we start having success in the Commercial business, it gains momentum. A lot of these commercial customers watch their competitors, and they see who they're buying from, and they see good results so they talk to them. They have a little associations in towns where they talk some, and you'll probably, some of the -- well, the first stores that we converted, these Checker stores in the center part of the country, I can tell you that they have really established themselves now as solid commercial providers, and we're doing really well in the Commercial business. Seattle follows behind that, and I think that we're pleased with all of the conversions that we've done considering the time that's elapsed from the point of conversion. And I think they'll all kind of fall into similar patterns as these original conversions over some period of time. Gary Balter - Crédit Suisse AG: Have they followed pretty much the way you expected it in terms of your ability to capture those customers? Has it been faster, slower, more expensive?

It's certainly not more expensive. I think that it's hard to know and it varies by market, and a lot of it depends on just the guys you have running the operation in a particular store and district and region, that I would say that it's met our expectations. I think that we would have expected that we would have had solid results as a result of the conversions, and we've had solid results. Would we like it to be just crazy better? Yes, we want to do as much business as we can. But I think that we're directly on path with what we would have expected as we converted these stores.

Your next question will come from the line of Kate McShane with Citi Investment.

Can you give a little bit more insight into what is driving the stronger-than-expected growth in your hard part sales? I know you guided that gross profit margins are going to be at the higher end of your guidance range as a result of this. But was wondering if you expect similar level of hard part sales going forward for the back half of the year, or if it's really from just the strength you saw this quarter.

Well, I think the things that we're fundamentally doing are going to drive more hard part sales in the Western stores, in the core O'Reilly stores and our more established markets. We're trying to grow both our Retail and Wholesale business, both in hard parts and in display-area merchandise. In the Western stores, we feel like we have more upside and more opportunity to grow in the Hard Parts business simply because CSK really was not a very good hard parts provider. Of course, when the Auto Parts business, that they were not nearly the robust hard parts provider that we are. So we think that we'll continue or at least we hope, that we'll continue to perform well in these hard parts lines as we grow it both in retail and we grow in commercial, which the commercial comes at a little bit less gross margin than does the retail. But we're hopeful that we'll be successful in establishing ourselves as a destination for the retail customers for hard parts. As Ted mentioned, that's what our advertising efforts are doing. And to the extent we're successful doing that, we mitigate, to some degree, the effect that the roll-in of more Commercial business has on our gross margin rate.

So the main difference then between your comments on the gross profit margin rate from last quarter to this quarter were you had emphasized that it might come in at the lower end of the range, but now you're saying it could come in at the higher end of the range is because of the success in the hard parts. So that is contributing to your business faster, I guess, than you had originally expected?

Yes, I think that's correct. And our plan would be, like I said, that this wouldn't be a single-quarter issue, that this will be something that we could sustain long term as we establish ourselves as a good hard parts provider to retail customers.

And your next question will come from the line of Matt Fassler with Goldman Sachs.

You pointed out obviously, that your second quarter margin was the strongest margin in the firm's history, and that was the case by ballpark, 100 basis points. And if you look at your guidance for the remainder of the year, you still have a very good quarter relative to your long-term track record, but by a much lesser degree. Would there be any particular reason why the, I guess, kind of profit level relative to history would recede? Or would you just attribute that to conservatism about the environment?

Matt, the operating margin for the second half of the year, obviously, is projected lower than the first half, and that's directly related to lower expected comps. So it's more a leverage issue, so we're pretty comfortable with our gross margin estimates for the second half of the year. And as you know, we are diligent in controlling expenses, and we'll, of course, focus on that to the extent that our comp store sales are above our guidance. We're going to see better operating margin results.

And then as a follow-up, Tom, you mentioned gross margin just a couple of the moving pieces within that. I guess where are we in terms of incremental buying synergies? And then what do you expect of the cadence of distribution leverage or deleverage to be as you work your way through the introduction of new distribution capacity?

I would say that we are -- have all of our buying synergies included. We'll continue to try to work on lowering our acquisition costs and becoming more efficient. That's just part of the business. On the second part of your question on distribution, I would say, we're at the most inefficient right now that we will be. Over the next year, we'll continue to get more efficient. We still have two DCs to convert, although, they're not additional incremental DCs. So really, over the next year as we train our team members, we're going to become more and more efficient.

How would you quantify the opportunity as those distribution costs decline as a percent of sales? Is that 100 bps over time or something less than that?

Something less than that.

And your next question will come from the line of William Truelove with UBS.

Do you anticipate, into next year, also probably having a higher advertisements on the West Coast related to the converted stores? And just to educate the consumers, if so, could that result in maybe slightly or less leveraging on the SG&A line for maybe the next four or five quarters?

When we look at our advertising, we have some additional advertising that's being done out West to augment what the standard O'Reilly program is. We're in the process of converting over a customer on the West Coast that was used to seeing a lot of hot prices and circulars. And that's how CSK drove traffic to more of an everyday low price. We are priced right everyday, and we have the parts in stock system. So we don't anticipate seeing tremendously more advertising expense. There still exists a few contracts that CSK was big baseball sponsor, they did some races. And as those contracts come up, we look at rationalizing those with our other national media exposure.

And your next question will come from the line of Tony Cristello with BB&T Capital Markets. Anthony Cristello - BB&T Capital Markets: The question I have and then a follow-up has to do with just sort of the conversion and some of the benefits you're seeing. Tom, on the call, you actually discussed in your prepared remarks shrink in some of the benefits you're receiving as a result of the systems conversions. Can you maybe differentiate or quantify some of the benefits you're seeing and then how different CSK was from a shrink standpoint versus a core O'Reilly store?

In general, the O'Reilly system works very hard at managing inventory. We have a very high level of accountability for the store manager with his inventory, both from a shrink dollar instance [ph] standpoint to replenishment standpoint. If the perpetual isn't right, they're not going to get replenished right, and they can't optimize their sales. So our system is built with a lot of tools to manage the perpetual inventory and make sure it's right. And identify opportunities to reduce shrink. So there was a pretty marked difference in the shrink amount between O'Reilly and CSK. As Ted talked about, it's a training issue, and we've seen great improvement in the stores that have converted. But there's still opportunity out there. Anthony Cristello - BB&T Capital Markets: And then just on the follow-up, I noticed that the rent expense was actually down year-over-year, even though it seems like you're growing and expanding. Is there something that you're benefiting from, as well, from a conversion standpoint? Or are you owning more properties? And can you just maybe help me understand a little bit why that would be actually down?

Well, first of all, we're going through all the CSK leases and doing everything we can to A, renegotiate leases as we get close to the end of the term or look for relocation sites and move to better sites that had less rent, and that's working pretty good. I mean, it's the right timing I think. Even on the West Coast, the real estate is not quite as high. And then in our core market expansion, the new store we're putting in now, we're finding some pretty reasonable property acquisitions out there to buy and build as well as some fair-priced lease spaces. So I think those conditions are good for expansion right now. Anthony Cristello - BB&T Capital Markets: So does it sound like in both the benefit of the gross margin from shrink and the benefit to the SG&A from leasing and rent expense? Are those, I guess, sustainable lease for the next several quarters?

We think they are, yes.

And your next question will come from the line of Mike Baker with Deutsche Bank.

I'm just wondering if you can talk publicly about what you think the average sales volumes can ultimately be in the acquired stores relative to the core O'Reilly stores that do, I think, about $1.5 million or $1.6 million. And then the follow-up I guess would be if you can provide that number, how does that break down between commercial and DIY? And would that be indicative of what you're seeing in the Checker stores in the center of the country?

Well, Mike, the core O'Reilly stores, the stores that we had prior to the CSK acquisition, many of those stores are stores that were put in as part of our incremental growth from our very young small company, are put in rural areas at very low rent rates or occupancy expense, many of them we own. Many of those stores operate below our $1.5 million O'Reilly average. If you look at the stores that are in the metro areas, in Houston, Dallas, Fort Worth and some other big metro areas, our average is much higher than that. The way we view the CSK stores, which most of them are in more metro-type areas, is that those stores could eventually do the volume that we do in our metro stores, which is at minimum, $1.8 million. And really, that's what we're targeting with an average on these stores is about $1.8 million over time. So yes, we think that over some period of time, we can get them to $1.8 million. The business mix out West will be a little bit more slightly towards the DIY sites and some of the locations approximately, I'd say, 10%, 15% are in locations that are much more conducive to doing Retail business than they are doing a combination of business. Although we'll do some Commercial business out of pretty much all locations, there will be some that will be much more conducive to the Retail business. So I think the business mix will continue to be dominated out West by the Retail side. But we'll add -- most of the growth will come on the Wholesale side or the Commercial side.

And any time frame on that type of $1.8 million?

Well, we're working as hard as we can to get there as quick as we can. I would say, Tom, what would you guess? 2013, something like that?

Yes, I think we'll look at probably four years after converting to our systems and getting five-night-a-week delivery to build the Commercial business.

Yes.

And your next question will come from the line of Alan Rifkin with Bank of America.

This is Vincent Sinisi in for Alan. My question is if you can give us an update in terms of the number of additions to the commercial sales force? And then it sounds clearly and certainly, in some of the earlier converted markets that the Commercial business has been beginning to ramp up for the CSK stores. Any update, at this point, to your forecast synergies for the overall integration? I know originally, it was 100 up to 125. Any updates there?

Well, let me answer the commercial sales force. We really haven't increased the sales force headcount that much out on the West Coast. I checked with the sales department the other day, and we're up probably about 10% on TSM, territory sales managers. Where we really put more investment in is the management of how they perform the job, and we basically doubled the number of regional sales managers to manage, I think it's right at 200 TSMs right now. And like they had four sales manager covering those 200, and we've gone to like eight to nine. And their goal was to more closely manage the productivity of the type of customers they call on and more accountable sales call schedule, plus our TSM commission schedule is quite a bit different than what CSK had, which really makes them much more focused on growing the business. So from the manpower out in the field, I don't think we've increased the dollars of salary out there. But we've definitely increased the productivity and accountability of the type of customer they call on and how they interact with the store based on building good service levels, and not necessarily going out there and selling price, but selling service and being competitive at the same time.

On the second part of your question on synergies, we're comfortable with the last number we gave, the ultimate synergy number. As we get further and further away from the acquisition and businesses integrate and normal activities occur with SG&A and with gross margin as we continually always try to improve that, it's hard to track down a specific synergy number. We're comfortable we achieved the last number that we gave out.

As you're looking toward advertising for next year, taking into account slightly higher for the West Coast markets, do you have a target in terms of percentage of sales, as well as the breakdown between the radio and the print?

Well, we go through an extensive process in the next couple of months of every year, when we look at how we want to spend our advertising dollars, where we think we can get a bang for the buck, what we think the appropriate amount to spend is given the current business trends. So that's still on the planning stage. We're going to be somewhere, give or take, around 1.5% of sales, is typically what we spend on advertising, with half of our business being in the Commercial side. Our sales force is really our advertising and marketing tool there. So that's a little different than if we are a full retailer.

And in regard to the radio and the print, I think Tom mentioned earlier, CSK was primarily print and newspaper, and a very expensive way to advertise. We've transitioned to print and fliers, which covers a lot more head of the households, and we moved a majority of what they were spending in print over to radio, which we think is very effective. CSK did a limited amount of radio, and we're doing quite a bit comparable to what we do in our core markets.

And your next question will come from the line of Dan Wewer with Raymond James. Daniel Wewer - Raymond James & Associates: Tom, I want to follow up on the guidance, particularly for the third quarter. Looking historically, quarterly earnings went back to 2003, and typically, your third quarter and second quarter earnings are almost identical. The only one exception was the year that you bought CSK. Therefore, the third quarter guidance of $0.69 to $0.73 looks a bit off compared to the $0.81 achieved in the second quarter. And I heard your answer earlier that the margins could be under pressure, same-store sales were to weaken. But it sounds like your sales are off to a great start. Margins are actually at the high end of the plan.

Well, I guess what I'd tell you, Dan, is that we achieved 7.9% comps in the second quarter. Our guidance for the third quarter is 4% to 6%. If we exceed that guidance and put up another 7.9%, our operating margins would look similar, and our EPS would be similar. So it's really the sales volume question. Daniel Wewer - Raymond James & Associates: But you're thinking that just a 2 percentage point change in comp sales growth could impact earnings per share by as much as $0.07 or $0.10?

It's a significant amount. It wouldn't be quite that much. That would be the upper end of our range, but it would be meaningful. Daniel Wewer - Raymond James & Associates: And then just as a follow-up on the strength in sales for O'Reilly and really your entire sector. One quarter ago, there was speculation that the ramp up could be reflecting a favorable change in winter weather. It could be reflecting earlier receipt of income tax refunds. We've cycled through that. Are we now thinking that we're at the tipping point where the aging of vehicles and fewer cars under manufacturers warranty, that's really beginning to kick in terms of the industry top line growth?

Well, like I said in my prepared remarks, it seems as though our industry is undergoing a pretty sustained period of solid demand for us, and I think this has been reflected in some of our competitors' comments. Around the 1st of February or middle of February, business picked up and based on our experience, it is sustained that better pace to this point. In our first quarter comments, we reflected on the potential for pent-up demand because of the softer fourth quarter and what generally happens in a period of recession with consumer spending around Christmas and trying to defer things that they can defer in order to have money to spend on the holidays. It appears as though we weathered that, and the trend that we're on is the result of some of the very clear dynamics that we can see in the vehicle population with regard to the vehicles getting older, the new vehicle sales continuing to be at levels less than they had been in prior years. And then, of course, gas prices seeming to stabilize and miles driven increasing, all those things add up to a pretty -- and based on our results, add up to solid demand for the aftermarket. Daniel Wewer - Raymond James & Associates: And I agree, it doesn't make sense to publicly forecast comp sales growth of 8%. But it does sound like you're thinking this ramp up is more secular, not cyclical.

I do, but we've been surprised before with comp stores sales changing abruptly. We've not experienced that this year, but that could happen. We have to remember that new unemployment is, I think, the last time I looked it was 9.6%. That's a high rate. And I just don't see anything on the horizon that's going to change that anytime soon. So there are a lot of people out there that are strapped for cash. And that being the condition, it's hard to project or be real aggressive on our projection of comp store sales. And then also, the effect that fuel prices could have. If fuel prices were to spike with maybe a hurricane or all the different things that could potentially happen that can drive fuel prices, a fuel-price spike, clearly affects consumer spending on other items and can affect miles driven.

And your next question will come from the line of Jack Wells [ph] with Focus Research.

I was very impressed with the 1.4% SG&A increase per store. But I was wondering how that was done considering that you have sales commissions, I assume, that go up in line with the 7.9% comp in sales. And since sales commissions are a big part of your SG&A, I wonder if you could break out, I guess, the non-commission related SG&A and how that is being so well-controlled.

We're hesitant to break out our store expense line. But obviously, as mentioned earlier on the call, the Real Estate group has done a great job of controlling our rent and we do see fluctuations in our payroll from the commission. But we're also seeing as better utilization of payroll and how we staff the stores out West to make sure that we have a pyramid-type wage scale, and we are appropriately leveraging people in the West Coast. And we continue to work hard at the CSK stores to bring the same expense control discipline that we've had at the O'Reilly stores for a long time.

Jack, just to kind of add to Tom's comment, the most impacting factor probably is just measuring the sales results of individual performance. One of the things that I feel like we've always been good at and we've been successful with is creating a competitive environment in a store with regard to sales performance of individuals. CSK didn't do that, and that really ensures that each individual carries their weight so to speak from a store operating expense standpoint. And while we've not done everything we'd like to do in that regard, we'll complete that over time. But we have seen good results with what we've done so far.

When it comes to the expenses involved in the entire CSK conversion, do you have a number of what that number amounts to, and how much of that would be saved going into 2011?

To kind of wind back to 2009 and to talk about 2009, 2010, together, Jack, the cost that in our physical assets, get capitalized, what we have incurred costs on the payroll line in 2009, a lot of store hours to reset the hard parts. This year, hours to reset the front end and hours for training on conversion. So that's an opportunity going into next year to recycle that payroll to other tasks, and ideally, it's to drive more sales volume, so that we get the bang for the buck. Otherwise, we'll take those hours out. I can't quantify for you specifically, but it's a reasonable number that we spent in both years through store payroll.

So you're saying that the hours you're going to spend on payroll in 2011 might be similar to the conversion hours you spent in 2010?

Well, how many hours we spend will depend on what the sales volumes are. But I'm saying that there are tasks that we won't do in the second half of 2011 that we've done in the last two years and have hit our payroll line.

So start having some benefit from this in the latter part of the first half and the second half of 2011.

And there are no further questions at this time.

Okay. Well, I would just, in closing comments, say, thanks for everyone's time. We look forward to reporting our continued progress with the integration of CSK in October along with our third quarter results, and thank you very much.

Thank you, everyone. And this does conclude today's conference call. You may now disconnect.