Good morning. My name is Carlene. I'll be your conference operator today. At this time, I would like to welcome everyone to the 2010 Third Quarter Earnings Release Conference Call. All lines will remain on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions) Thank you. Mr. McFall, you may begin your conference.

Thank you, Carlene. Good morning, everyone, and welcome to the O'Reilly 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 expansion strategy, business 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 Corporation, 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 would like to introduce Greg Henslee.

Thanks Tom. Good morning everyone and welcome to our third 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. David O'Reilly, our Executive Chairman, is also present. I'd like to start off by once again congratulating team O'Reilly on the outstanding results. Our performance across all markets in the third quarter was very strong and we should all be proud of our performance so far this year. Especially impressive is the continued outstanding performance of the core O'Reilly stores. We have asked many of our more senior team members to take on the task of attending the CSK conversions and it has been the first couple of weeks after conversion training the converted store team members. Even with these distractions, our core stores have continued to gain market share and post very impressive comparable store sales gains. At the same time, the work that we put into these conversions is clearly very improved as we continue to gain market share in the converted stores. The strong comparable store sales that we have been able to archive in the converted stores have been the team effort, and every team of O'Reilly member should be very proud of the success we are having with these conversions. Our outstanding sales performance is the direct result of the incredible customer service levels we provide at each of our locations and I want to thank you for your commitment to providing the best customer service in our industry and to the continued success of our company. Before moving on to discussion of our operational performance during the quarter, I want to comment on the $5.9 million reserve we accrued in the third quarter to fund settlement of…

Thanks, Greg. Good morning, everyone. To start, I would like to also thank our nearly 4900 O'Reilly team members for the absolutely outstanding results in our third quarter. Without question the general conditions for the auto parts business have been good. However, for our team to produce 11% comps defines a superior level of service, we are giving our customers, and the market share gain we are experiencing across the core of O'Reilly stores as well as our new conversion stores at West, also our 14.4% operating margin last quarter demonstrates our teams' ability to effectively manage both our expenses and gross profit. Most amazing, these results parallel with the work of various projects involving CSK to O'Reilly store conversion and the installations of our new distribution centers. We are proud of our teams above and beyond commitment to take care of our normal business while managing the integration of CSK into our company. We are anxiously looking forward to next year when we have the mini task of the conversion behind us. All the support we place on the west coast and our entire team can be 100% focused on growing our sales. Before commenting on our progress in the conversion work on the west coast, I will quickly summarize our new store expansion for the third quarter. We ended the quarter with 3511 stores, a net gain of 44 new stores. This brings us up to 115 stores year-to-date and on schedule to end the year at 150 new stores. Again an incredible accomplishment for our store expansion and installation team members, considering the additional work load involving the West Coast conversion and reset work that were outlined in net. Also we performed 11 major store innovations and relocated 4 stores into the new locations. In regard to…

Thanks Ted. Now, we will move on to the numbers. For the quarter sales increased to $168 million, 13% over the prior year to $1.43 billion. The increase was a tribute to our $136 million increase in comp store sales and $30 million increase in non-comp store sales and a $2 million increase in non-comp non-store sales. For the quarter ticket average and ticket count contributed equally to a comparable store sales increase. The increase in ticket average continues to be driven mainly by mix as sales of hard parts which are typically carry a higher ticket accounted for a larger portion of the overall sales volume. For 2010, we are increasing our total revenue guidance to a range of $5.3 billion to $55.4 billion. Gross profit was 48.6% of sales for the quarter versus 48.5% in the prior year. The 10-basis point improvement was driven by improved acquisition cost and improved strength at the converted stores. These improvements were in part offset by de-leverage on the distribution cost which is a result of the new DCs coming online inconsistent with our expectations. Year-to-date gross profit stands at 48.6% of sales and for the full fiscal year we expect gross profit to be approximately 48.5% of sales. SG&A for the quarter was 34.3% of sales versus 36.7% in the prior year. Leverage and SG&A was of direct result of the strong comparable store sales. On a per store basis, SG&A per store is up 2.6% which allowed for strong leverage at 11.1% increase in comp store sales. Year-to-date SG&A improved 200 basis point as a result of strong sales and expense control. For the full year, we expect SG&A dollars per store to be up slightly from 2009 as we continue to see opportunities to more aggressively invest so SG&A…

(Operator Instructions). Your first question will come from the line of Scot Ciccarelli with RBC Capital Markets

Look, I know you guys don't break out CSK specifically anymore, but is there any color you could provide or a way to think about the impact that the commercial sales close at the CSK Stores has had on the overall company?

As I have talked about for some time, Scot, we're not going to break out our sales on a secular way like had done. It was confusing to many and it was just a small thing for competitive reason is another reason we decided not to do. I will tell you that the CSK commercial program is contributing significantly to our performance. If the converted stores in general, our oldest converted stores are best performing comp stores. What I am implying is that the conversions are working and that commercial business is a majority of the gain that we are seeing and comps in the converted stores. The longer the stores been converted the more traction that they get.

Given that the growth that we've seen in the commercial side, have we kind of reached a gross margin peak? Isn't there margin delta between commercial and DIY?

Yeah I think so. As we continue to grow the commercial business we will continue to put some pressure on our gross margin, but we have a lot of mitigating factors in our company that we work to maintain our gross margin.

Your next question comes from the line of Brian Nagel with Oppenheimer.

The first question I have, if you just look at the sales line articulated in your prepared comments a lot the drivers of sales but as I look at your sales and I characterize it was great in the second quarter to really great in the third quarter, an acceleration if you look on a two-year on your comps. Is there anything you saw that could explain the acceleration we've seen over the last few months in the business?

There's a lot of positive factors, all the macro factors that we talk about. Also at least in the third quarter we had what I would consider to be almost ideal weather condition to drive some demand on summer products like temperature control products and batteries and things like that. There's other macro factors are meaningful and those factors with the cars having more miles on them, the car is being a little older on average than what they were and people having made the decision to drive those cars for even longer than maybe they originally planned when the recession started, I think those factors are just continuing to build, but I do think we had some benefit in the third quarter just an unusually warm and dry summer in those markets which was good for us.

The follow up question longer term in nature, you commented in your prepared remarks that you look at trends that you believe they maybe longer lasting. You talk a lot about the macro environment and obviously a lot of the very significant changes you made in your model with the integration of CSK, but is there something you are seeing specifically within maybe customer data etcetera it gives you the confidence this is more than cyclical type phenomenon, it's more of structural type shipment in the business.

I don't think we have any data that wouldn't be available to you just from a pure macro level. What we see that you don't see obviously it just the types of products that are being (inaudible) of the cars and we do really well on the repair parts, maintenance parts and in many cases the horse to hire mileage vehicles take. My observation has been, its observation is several in our industry is that the cars that have been built over the last 10 or years are generally higher quality cars what have been built in the years prior and because of that the enhancement that we are made by the OEs during the time to make the interiors last longer, make the bodies last longer, just make it more comfortable and presentable to drive at higher mileages. That is people, who have spent some money on maintaining these cars. They will continue to invest in maintaining them because they are not a cars that they don't want to drive. These cars many of them can be driven at over 200,000 miles without having major drivetrain issues, engine transmission, differential or transaxle and because of that people are willing to maintain the breaks and suspensions and ignition and the drivability components. What we will see is that the consumer behavior with regard to trading cars every three or four years a less than 100,000 miles. That maybe long-lasting.

Your next question comes from the line of Michael Lasser with Barclays Capital.

On the leverage that you been seeing so (inaudible) a store was up 1.4% in the second quarter, almost 8% comp increase it was up 2.6% in the third quarter on 11% comp increase. The 300 basis point delta should we continue to think about the ratio of SG&A per store increases to comp increase. Its 1 for 3.

Tom, do you want to take that.

Some of that is going to be a sliding scale on how high or low comps are. As we have talked about previously especially on the acquired stores, which have high occupancy cost, which is fixed. We have a tremendous amount of opportunity to leverage those sales with the existing expenses. When we started the year, we discussed that we thought that first store SG&A would be relatively flat not down a little bit. Obviously that was on a lower comp assumption, we have quite a few variable costs that will drive our businesses. We see more customers and but we still have a tremendous amount of fixed cost to leverage. For the remainder of this year, I would say Michael that statistic holds true, as we start to anniversary high amounts of leverage on sales increases. That's going to be a lower number, but we still have opportunity next year to be well above our historic rate.

This is my follow-up. Next will that flat SG&A per store fits in the mid single-digit range that holds true?

We will give you the guidance on the next call for get back in the compartment.

Just a broader question, it seems that like part of the message you are articulating earlier this morning and in your analyst days that you are nearing, the end of some of the heavy lifting on the CSK acquisition. Now the focus turns organic growth and various improvement initiatives such as price optimization etcetera How much opportunity do you think there is to both on the margin and the sales side from some of these initiatives that you are going to now turn to given the renewed focus you will have?

Well, Michael we don't really know the full uncapped availability some of the things that we have not done yet. Although we have done some early tests things like price optimization and other things. It will be premature to apply a perspective number to what we can do in gross margin due to price optimization. What we can do sales wise to enhance, very solid program we have already with some additional things that we can do with our point-of-sale systems and ecommerce content and the transaction products and stuff like that. There will be positive. The things that over the last two and half years we probably would have already implemented some of these things, we not been so focused in resources tide up along the integration of CSK because they are things that are tested and work well and they have been used by many retailers and they are just opportunities for us. Now that we are going to have a little bit more time to focus on things we can do to improve our business outside of the integration at CSK. We will continue to report on these things, but that we would expect to be positive results from them based on our early analysis of test.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

It's actually [Steven Greg] with [Mandelin Research]. A couple of things you guys mentioned earlier in the call, to enhance ecommerce capabilities of the big initiative in the organization. Can you provide some colors to what you guys are doing regarding that initiative?

Well, there is several things on ecommerce. We have been managing transactions with our installer customers for year before the internet was prevalent mainstream. We did transactions with our installers green (inaudible) terminals that we would setup. Over time we enhance that to internet based and now we have systems integrated in to the systems that they that will allow internet based transactions. Our efforts both on that front and on the retail front are to improve the content it's available to the customers. They can see more about our products, see more about the availability products, maybe schedule better the amount of time spent to take them to get our products on the commercial side and really just the things that you see some of the best ecommerce retailers doing. Like I said earlier, some of the work that we have doing on CSK is probably had us a little bit distractive from focusing on some of those things over the past 2.5, 3 years. We gotten back to focusing on some of the fundamental things that we feel are opportunities for us. Most of them revolve around content and integration in to systems that we want to improve.

Just a follow-up to that, are you steering people to buy products on your side or you just more using as informational source to get people to your stores? Second to that, are you guys building like mobile commerce, social commerce solution to gain more (inaudible) out there in the marketplace a lot of people to go on be an iPhone etcetera.

Yes, we will at some point implement mobile apps for access to our website. We want to do as much ecommerce business as we can. We would steer our customers to buy online, which we have sell in online for quite some time now both commercial and retailer side. As I said, yes, we would steer customers to do that, but we also do very well with our existing buy online, pickup and store or just the enquires that can take place on the internet particularly one of our local stores. We have enough stores in mini markets so that using an internet to do enquires, whether we have a product, what price, what it looks like, it's a enhancement to retail transactions, but sure we want to do as much as we can online, where a little bit hand tight when it comes to pricing in the internet, because we certainly want to price lower on the internet that will be priced on in our stores for local customers. We are working on some things there that might improve that situation too.

Our next question comes from the line of Kate Mcshane with Citi Investment.

On the last call you had said that in the O'Reilly stores and more established markets you are trying to grow retail and wholesale in hard part. Can you tell us where you are with this initiative in the O'Reilly stores and how this falls in to the equal to the went to outline today for the concerted CSK stores?

Well, I'll make a couple of comments and then Ted may have some comments that he wants to make this too. One of the things we talked about early on we acquired CSK it appear to us they gave us some of the core auto parts business that have been foundation for all of our operations and they given it up and exchange it for some of the import non-automotive accessory type products that, we really not (inaudible) one because we just have always done well in auto parts until our focus in auto parts in too. We don't feel as confident in the ability to have demand for those products without the support of ongoing large advertising spends and promotional support. Yes, our advertising efforts in the CSK markets are focused around exemplifying our ability to be a great hard part supplier at competitive prices and we're seeing much improvement in our hard part sales in those markets and we'll continue to do that. Of course to add to that typically what repair shops and commercial customers buy all these hard parts. Yes, we are doing very well there. That's our focus as to take these, is to continue taking these stores through a transition of this large portion of non automotive products over the hard parts. I feel like we've been successful to this point that we will continue to have more success with that as we continue to gain traction and the reputation for being a company that can supply auto parts and hard fine parts.

Yes, and obviously started by putting inventories in the store when we purchased CSK generally speaking their back room inventory was very, very poor on the majority of the stores. They had some larger stores of their installer business that had good hard parts inventory, but over time they had just, they had swapped accessories business for their parts business. Also the parts, the hard parts they did have they were at parity and they didn't have a very good selection of house brand, entry level product, good, better best concept. It's, it all starts with educating the customer because for many, many years their ads, all their print everything that the retail customer saw would indicate that they were more of an accessory house tool promotional house and now we got to more or less rebrand the company in the eyes of the hard core DIY customer, the ones that really buy the hard parts that what are the place to go for parts now and that we are competitive because again not only did they have very good inventories, what they had, their mindset was that they could be 10%, 15% higher than the competition. It's all coming along well. Again it won't happen over night. They've taken years to build that reputation. It will take us a while to build, rebuild the reputation to be a hard parts store.

This is a follow-up to (inaudible) in terms of the inventory then for hard parts at those CSK stores, where you want to be at this point?

No, well, we have plenty of inventory and to the extent that I think we have too much inventory. We are working to adjust those inventories incrementally, but we don't want to get too far ahead of ourselves on the adjustments because we still have a lot of untapped potential in those markets. We put these hard parts out there awful quickly and we use good systems and information to decide inventory to put out but in some markets there maybe has a population of customers that may be wouldn't be as inclined some of higher priced branded products we will be making adjustments over time in just our assortment of hard part products to better fit the markets and some duplication that may have in line now.

The reason we maybe to some degree too many hard parts out to begin with because we didn't have our distribution centers in place and they weren't nigthly delivery service and now the all store being service nightly we have a hubs in place. (Inaudible) we can selectively go back fine tune the inventories.

Your next question comes from the line of Alan Rifkin from Bank of America

Greg I certainly realized that the oldest checker stores that were converted easiest are performing the best. The various steps in the conversion process between the implementing the computer systems and putting the hard parts in the store and the plongrams and the resets what that various stages of course together with the exterior signage, what in your opinion drives the greatest incremental benefit once each of those conversion processes are added to the stores?

Clearly, its having the hard parts, that's the business we re in while our system faculty making transactions the way we wanted making electronic connections with the commercial customers and sourcing parts. We go like our planet ramps are optimized to do business the way we want to do business retail and the resets are just something that you have to do in retail to keep your store looking fresh because some of these stores were getting pretty weathered. Clearly having the parts on the shelf is what makes the most difference. Now to Ted's point earlier, from quarter retail perspective, once you have the reputation and customers form buying habits they're going to one of your competitors to get hard parts that's not an easy thing to break. We have incrementally improved that as we've owned the company and had better inventories and will continue to put our marketing advertising effort than to exposing that fact to consumers. That's something that gains momentum. As customers realize that we are in the hard parts business. Clearly that's the most impacting factor.

Allen, this is Ted. Another thing that you didn't mention there and particularly on the wholesale side of business. As we addressed the staffing levels of each of these stores to make sure that we have professional parts people in the store that can handle installer business, that's a huge plus. I mean, you can have the parts but if you don't have the people that can sell the parts, you don't have enough people, the right people, you don't maximize your sale. That's an ongoing process that we're working. We had a lot of good people to start and we just need to add more people as our business continues to grow.

Allen, the other factor there is just distribution capability. We put inventory out on the stores initially to help the CSK Stores that didn't have good access distribution and they helped some, but not having overnight access and same day access to many stores to larger inventories is a big help, because the average stores have a little over 20, 000 SKUs and our DCs would have more like 120,000 and that access makes a big difference in our ability to allow. We want to hire good people and get people in the position that they can be successful but then also deliver to the commercial customers.

It certainly is understandable that DC cost in the quarter was de-leveraged and that's a direct result of opening up five new DCs in a very short period of time. First of all, would you be able to quantify how much DC costs were delivered? Would it be fair to assume with Phoenix now opening in just couple of weeks, is the third that just reported point in time where your get maximum de-leverage on the DC costs?

First, when you look at the amount of de-leverage it was less than what we would have expected or planned based on the DCs coming on line. When we look at where the maximum is really the issue for us at this time is team member training and efficiency of team members. We're confident in our ability to get back to where we've been historically on a percent of sales standpoint, which have a lot of new team members out there. As we ramp up these converted stores our emphasis is on making sure that if anything we're over servicing the stores and over time we'll be able to reduce that. I'd say this quarter was probably our maximum de-leverage as DCs are converted (inaudible) become more and more efficient.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

A lot of my questions have been answered but there is one that I want to focus on and that is sort of the seasonality of the fourth quarters. I guess some strange things happened in the past two years in terms of your sales in Q4 relative to Q3. As you think about the reality that we are in a somewhat more stable economic environment do you feel like what transpired last year and year before was symptomatic of kind of the economic chaos that we had more or less? Do you feel like in a more stable environment you can return to more typical seasonality? Are you making special plans with regards to the cost structure inventory as you think about your financial planning for Q4?

Matt, we hope that the factors you stated are right. We've experienced erratic sales in the fourth quarter for a longer period of time than just the recession due to holiday spending and the fact that the onset of winter can have and so forth. We're doing everything that we can to make sure that our fourth quarter is strong and it's a trend that we've had coming out of the third quarter continues. As we've seen, we've been surprised before following thanksgiving when heavy holiday shopping stocks and limited dictionary cash that consumers have start going elsewhere. We'll just have to see. It's always easier for me as it usually back at comps and make comment that how they plan disposal the [core] but we're hoping for the best but we're trying to plan as reasonable as we can. To your question about our resources for the fourth quarter, from an inventory standpoint, we really don't make much of a change there. Our inventory are pretty well set service the vehicle needs and the areas that they service and we just don't have that many promotional products that we push out seasonally that make a material impact. Now, labor payroll we certainly do make adjustments to that based on and those adjustments are made weekly based on our staffing system projections that we have out in the stores and they adjust for the business cycles we have season after season so, we are in good shape there.

Your next question comes from line Colin McGranahan with Bernstein.

Do you have a sense of what you think your market share looked like in the quarter, I'd assume commercial was up nicely but any sense clear DIY versus commercial? What kind of share gain did you see?

I think we grew share in both. It's hard to measure the total market to know how much share we gained but I think we gained share on both sides. Both were good contributors to our growth. The do-it-for-me side, we've clearly taken a lot more share there than we have on the retail side just because we've put so much effort and capital into the commercial business had in the West stores and the converted Checker stores here in the country and the Murray stores so that growing. Yes, we are taking a lot of market share on the commercial side. I see some market share in retail both are performing but that I don't have a specific market share number for you

Just a quick follow up, it's not that important but I'd be curious as to what the justification was from the Justice Department to fine O'Reilly shareholders $20 million from actions of previous management?

Well that's the next question I was asking. Their perception is that crimes were committed and there should be a penalty applied for that. While our perspective was there probably wouldn't be a penalty and our advisors felt like there wouldn't be a penalty at time of the acquisition it turned out that there was. We've now put that behind and its history. The fine is applied to CSK, but I can tell you I defended our shareholders' position as aggressively as I felt that could be defended. This is what we ended after a long negotiation, so are glad to have it behind us.

There are no further questions at this time. I would now like to turn the conference back over for closing remarks.

Thanks everyone for your attention this morning. We were certainly proud of our performance in the first quarter and you can bet we'll be trying to accomplish great results in the fourth quarter and we'll look forward to reporting those results to you after the first of the year. Thank you very much.

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