Good morning. My name is Paula and I will be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Automotive Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Mr. McFall, you may begin your conference.

Thank you, Paula. 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. You can identify these statements by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contained within this press release 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 and 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 regulations, the company's increased debt levels, credit ratings on the company's public debt, the company's ability to hire and retain qualified employees, risks associated with the performance of acquired businesses, such as CSK, 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 annual report on Form 10-K for the year ended December 31, 2011, for additional factors that could materially affect the company's financial performance. The company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts 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 would like to begin today by thanking all the members of Team O'Reilly for their commitment to our ongoing success by providing industry-leading customer service. In the midst of a quarter where we saw continued impact from a challenging economy and the lingering effects of a mild winter, we were still able to increase comparable store sales by 1.3%, which was on top of a 4.8% increase in comparable store sales in the prior year and on top of a challenging 2-year stacked comparable store sales of 15.9%. Our relentless focus on profitable growth, combined with a solid expense control allowed us to increase operating margin to an all-time quarterly high of 16.4%. During the quarter, our focus on generating profitable sales, especially in the midst of the current challenging macro environment, combined with disciplined capital allocation, allowed us to increase our diluted earnings per share by 20%, marking our 15th consecutive quarter of adjusted diluted earnings per share growth of 15% or greater. We are all contributors to the success of our company and our continued dedication to providing both our professional and DIY customers with the highest level of service each day will allow us to continue our profitable growth. Again, thanks to all of Team O'Reilly for your commitment to our continued success. Now I'd like to add some color around our sales results for the third quarter. As we discussed on our second quarter earnings results conference call in July, the third quarter included an extra Sunday,…

Thanks, Greg and good morning, everyone. Before I get into my comments for the third quarter, I want to take a minute to thank our store and distribution teams for their continued dedication and commitment. With the challenging sales environment that we have experienced over the last several months, we are more aware than ever before that the long-term success is built day by day, one customer at a time. Our store and DC teams continue to provide top-notch customer service every day. I want to thank them for their hard work. We saw a continued challenging macro environment in the third quarter, and Greg spoke to some of the regional variations we saw in our results so I won't rehash those comments. What I would like to focus on today is our commitment to long-term profitable growth. Expense control has always been a core culture value for O'Reilly so we always want to have productive store payroll while allowing for some extra payroll dollars and hours necessary to continue growing the business. As a result, in difficult macro sales environments, we can't make immediate significant changes to our SG&A structure without negatively impacting service levels. However, we do make well-thought-out adjustments to our SG&A to ensure we react to sustain sales trend but always keeping the focus on maintaining our long-term profitable growth. Our third quarter results shows our ability to, over time, adjust our SG&A while protecting sales as we deleveraged by only 43 basis points on a soft 1.3% comparable store sales growth. For the first 6 months of 2012, our SG&A per store had increased to 2.8% over the prior year. However, due to store-by-store adjustments to payroll and adjustments to our advertising spend, we were able to decrease the year-over-year increase to 2% at the…

Thanks, Ted. Now we'll take a closer look at our results and add some color to our guidance. Comparable store sales for the quarter increased 1.3% on top of a 4.8% comp last year and an 11.1% comp 2 years ago, yielding a 3-year stacked comp of 17.2%. Year-to-date, our comparable store sales increased 3.7% on top of prior-year comps of 4.9%. DIY and DIFM were, again, both positive for the quarter with DIFM contributing a larger percentage to the growth. Average ticket growth for both DIY and DIFM sides of the business was again the driver to the comp improvement. We continued to see pressure on our DIY traffic counts, which were down for the quarter but were partially offset by positive DIFM traffic counts for the period. For the quarter, sales increased $66 million, comprised of a $20 million increase in comp store sales, a $47 million increase in non-comp store sales, flat non-comp, non-stores sales and a $1 million decrease from closed stores. As Greg mentioned earlier, while we are encouraged by the improving comparable store sales trends thus far through October, we remain cautious about consumer confidence levels and the potential impact on spending during the remainder of the fourth quarter, especially during the volatile holiday season. In addition, as a reminder, our stores are closed on Christmas Day and, because of the timing of Christmas this year as compared to last year, it moves from a Sunday in 2011 to a Tuesday in 2012, we anticipate this change will have an approximately 50 basis point headwind on comparable store sales for the fourth quarter. With these factors in mind, our guidance for comparable store sales for the fourth quarter is 2% to 4%. Based on these projected fourth quarter comp sales and the softer than…

[Operator Instructions] And your first question comes from the line of Alan Rifkin of Barclays.

A couple of questions if I may. So Greg, in the past, you had talked about performance of CSK stores, over the longer course of time, getting to $1.8 million per store. I think it's been a little while since you updated that number. Could you maybe give us an update as to where that is today and do you still think the $1.8 million is an achievable number?

Yes, we do. The CSK stores are divided into different sections of the country, and the upper Midwest stores have not performed as well as the Western stores. And we relate that primarily to just the weather effect that we've seen throughout the industry as a result of the milder winter last year. Speaking of the Western stores for just a moment, they've continued to perform very well and we're well down the road to getting to our $1.8 million goal, and we would expect that we will do that in what, Tom, would you guess? Somewhere in 2014, probably?

Alan, as you know, we're getting away from giving regional performance as it causes competitive issues for us, but we continue to make very good progress. We continue to be very comfortable we'll hit the $1.8 million number and then we'll set a new goal from there.

And Alan, just to add something to that for you, when we set that, part of the rationale was that many of the markets that we do business in today, big metro markets like Houston or Dallas/Fort Worth or just other large markets where we have a large population base, a lot of miles driven and a lot of vehicles, our stores today exceed that $1.8 million average in many markets, and it's not a stretch for us to expect that in these larger markets out west. It's just taking time, as we expected and as we talked about when we bought CSK, to ramp the stores up to that rate, but we fully expect that we'll get that and, in some markets, even past that.

Just a follow-up if I may. So Greg, with more and more of the competition certainly targeted at the commercial side of the business, which has long been your mainstay side of the business, I mean, what incrementally are you guys doing to defend your share on that side of the business?

Well, we're work -- as I talked about it earlier, we're putting -- strategically placing more inventory out in the stores and kind of beefing up our hub network. We continue to educate our team members on the best ways to manage relationships, the best ways to use our professional customer promotions to maintain relationships with customers. And the main opportunity with any relationship with a professional customer is just the level of service that you provide. So we're making sure that our team members have the facilities and assets they need to give the best customer service in the industry. And we think we've been very successful in defending against more retail competitors as they come into that business. So we feel like we've done a good job defending our market share there.

And one last one if I may. The 390k DC in Lakeland, Florida, is even larger than what we thought. First of all, how many stores do you think you can ultimately have in the southern portion of the state and how many of the 190 earmarked for 2013 will be in Florida?

I'll have Ted give some color on that.

Alan, we're thinking probably in the 300 to 350 range for Florida, total, and the DC will handle that. In other words, that'll take care of the entire state. And then as far as expansion in 2013, like I said, we've got about 51 stores open now and we would expect to probably have another 25 open next year. We're going, to some degree, kind of push those back towards the end of the year to make sure, from a service level standpoint, that the DC is opened relatively quick after stores open in the central part. Like I said, we have 2 hub stores, super hub stores open now in central Florida, which will help a lot as far as the same-day service on parts availability, in addition to overnight out of our Atlanta and Mobile DC. So I think there will probably be about 25 of our stores will be in Central Florida next year.

And then just something to add to that, Alan, is that part of the rationale with the square footage there is to take some pressure off our Atlanta and our Mobile DCs, which are servicing some of that area now, which is a little bit of a stretch for the ideal range for those distribution centers.

And your next question comes from the line of Gary Balter of Credit Suisse. Gary Balter - Crédit Suisse AG, Research Division: Alan asked about the professional side. Could you talk about what you're doing on the DIY side? That seems to have been the weaker area and remains the weaker area. What efforts are doing to try to...

We're doing a lot of work on the product offerings that we have in place to draw the DIY customer more to -- in many cases, expanding our private label products, making sure that we're price competitive on the entry-level products. From a store staffing perspective, we're working to make sure that our stores are staffed for nights and weekends, which is typically when the DIY business happens for the most part. From a system standpoint, I talked earlier about our electronic catalog. A big part or a big push with this electronic catalog is the content that exists to express to a customer that's maybe working on their own car, the things they might do to fix a car, help them diagnose the problem. Just give our parts specialist better information when discussing with a DIY customer the process that they might go through to repair a car. And all those things over time, we think culminate into a higher level of customer service to the DIY customer and we think it's working for us. As we've talked about in the past, our average DIY volume per store versus some of our competitors leaves us with an obvious opportunity to grow market share there, and we're working today to do that. Gary Balter - Crédit Suisse AG, Research Division: And just a follow-up and you kind of addressed your gross margin a number of times during the call, but one of your competitors, earlier this week, talked about promotional activity in the sector. It was very hard to see in your strong gross margin results and it doesn't sound like that has anything to do with the guidance you're giving for Q4. What are you seeing in the environment right now?

Well, the promotions that we all run are pretty similar. They're promotions on the DIY side that would be for commonly used items, maintenance items like oil changes and motor oil and filters and stuff like that. And we run them pretty similarly priced. I guess the variance between us would be the frequency at which we run them, the length we run them, the number of products we run at one time. So we've not seen any major change among any of our competitors with what they do there. What we have seen on the do-it-for-me side is just the work that a company coming into the do-it-for-me side will do to draw a customer to them. And since in many cases those companies don't have a service advantage or availability advantage or any advantage other than the fact that they might be able to offer a customer a lower price for a period of time to maybe change buying habits or something, my guess would be that when that was spoken of, it was more on the promotions on the do-it-for-me side.

And your next question comes from the line of Scot Ciccarelli of RBC Capital Markets.

I think you had mentioned there's a significant difference in performance in some of the Midwest markets, and I think you mentioned another area as well. I guess the questions related to that are, first, can you give us an idea how much of a difference or spread you're seeing in those markets? And second, what percent of your stores are exposed to those areas?

Well, it's hard to draw a line and say here's the stores that were affected and here's the stores that weren't. But the way we would look at it is that our -- the Central Midwest, Upper Midwest, the Great Lakes regions, that those were the markets that were most affected and that's where we see the effect on our comp store sales the most. If we compare that area of the country with some of the regions that just were more temperate, that were not affected so much -- and let me back up. So we would consider those stores to represent about 25% of our store base, thereabouts. And again, it's hard to draw a specific line, but we would see as much as about a 700 basis point difference in their performance from a comp store sales perspective during the third quarter to the markets that are in a more temperate area.

That's very helpful. And then just quickly on the -- I guess a balance sheet question. You guys are expanding kind of gross margins rapidly, AP to inventory ratio is going up. Does it create a situation where you start to get some pushback from your vendors?

Well, I mean, none of this is easy. You don't -- the vendors haven't been knocking our door down trying to make these deals but we have -- for a long time, we've had fantastic relationships with our suppliers. And our suppliers, part of their growth and success is contingent on partnering with companies like ours to grow their market share and the availability of their product offering to customers. So there's some end, certainly to what we can do from an AP to inventory standpoint. But to this point, we feel like our vendors have been very in favor of the things that we've done and that they've benefited from it. And Tom, you might have some comments on the financing part of it.

On the financing part, our goal is to make this a win-win situation and that was a big factor in us going out, becoming a publicly rated company from a debt perspective, to lowering the overall borrowing costs for our whole supply chain. So our ability to offer that lower cost and reduce the working capital requirements for our vendors is a savings for them and we have shared in that savings. So from our standpoint, we're looking for a win-win situation. When we look internally, we have also committed a significant amount of capital over the last 5 years in new store growth, distribution centers, acquisitions, and our vendors see our investment in the business as an opportunity for them to increase the breadth and penetration of their products across the U.S. So we're looking for win-win situations with our vendors. We can't be successful unless we have vendors that are also successful.

And your next question comes from Matthew Fassler of Goldman Sachs.

First of all, we hear you loud and clear on gross margin for the fourth quarter of 2012 and what might be driving the flattening of that performance year-on-year. If you think about your opportunities, particularly on distribution, how do you feel about the longer-term gross margin trajectory for O'Reilly?

I think we have some continued opportunity. It's going to come from several different places: one, we have the opportunity to grow our DIY business, which is higher gross margin; we think we have continued opportunity on the acquisition costs side; we continue to look to countries that we currently don't buy products directly from. In some cases, there's opportunities for us to enhance private label products with some of those offerings. And just through managing our pricing better. I know you hear every retailer talk about price optimization and I don't think there is just one way of doing that. And on our professional side, that's more complicated and difficult than it is retail, but I think we have some opportunity there. Just to take a wag at what our opportunity is, I would say that we have an annual opportunity of like a 10 to 20 basis point improvement over the next few years.

So you think the pace -- because this was a very good year, obviously. Do you think the pace of that movement probably moderates from here in the fourth quarter as the beginning of that?

I do. I think that the fourth quarter, we kind of annualize a higher gross margin step-up that our company made and that we would see slower growth from that point forward.

And my second question, if I could, relates to the weather-impacted versus unimpacted markets. And the breakout you gave us on the 25% impacted, 700 basis point gap is very helpful. I guess there's two ways to ask this. One is, has that 700 basis point gap been consistent since the business started to slow down? And I guess the other way is, what was the trend in the non weather-impacted markets? Did it stay the same, accelerate, decelerate, et cetera?

In the non weather-impacted market, the third quarter was a little slower than what it had been in the second quarter, so the trend was slightly down. As far as the -- the trend from the second quarter to the third quarter was pretty similar, a little bit more of a drag. When we look at the more temperate markets, they have been pretty consistent all year long.

And your next question comes from Greg Melich of ISI Group.

I want to follow up on the top line and how inflation or disinflation may have impacted that when we talk about the deceleration we've seen this year. And then also, how that's -- why you expect an acceleration in the fourth quarter comp, especially given the Christmas shift.

Well, this is Tom. I'll answer the first part on inflation and let Greg talk to the more -- the broader sales environment. When we look at the third quarter specifically, we actually saw a little drag from pricing, and we'll see our LIFO reserve decrease. Then there was a slight positive to gross margin. When we look year-to-date, we're relatively flat, maybe a little bit of price pressure, which creates a little bit of headwind versus last year through this time of the year when we had seen a tailwind from inflation.

And then just, Greg, from a broader perspective, just the drivers of comps, the effect of weather and stuff like that, we feel like that the cold winter, as exemplified by our performance in these Northern markets and our competitors' performance in these Northern markets, that there's no question it had an effect. The extent to which it's a factor is a little bit hard to measure other than the way that we articulate the performance. We gave a little more information this time than we would normally give and, similar to our competitors, we're just trying to give everyone the ability to assess that situation as best as they can. We've been very encouraged by our performance so far this quarter. Our comp store sales started improving at the end of September, and that improvement has very consistently sustained to this point, 3.5 weeks through the fourth quarter. Let me talk about holiday season can be a little volatile because of holiday spending and things like that, but our expectation or estimate, just based on years in this business, would be that if we have a cold winter this winter, that very likely the aftermarket will have a good season.

Tom, if I could just follow up on your answer. Last year, there was some inflation. Could you help us quantify that? Was that like 100 bps or 200 bps or...

It would be between those two.

And your next question comes from the line of Dave Gober of Morgan Stanley.

Going back on the top line and not to get into too much of any degree there, but are you seeing that drag from the weather impact to markets fading at all? Is that what you're seeing in late September, early October? And as we think about the fourth quarter, you mentioned the 50 basis point headwind from the shift in Christmas, but are you also picking back up for the Sunday that you lost in the third quarter?

This is Tom. I'll address the Sundays. We have an extra Sunday during the year. So we have the same number of Sundays in the fourth quarter as last year except that we were closed one of those Sundays last year and not closed this year. So in essence, same number of Sundays but we pick up an extra Sunday business day.

And then to answer your question as far the weather drag or the potential effect on the markets that were most affected by weather, yes, we've seen a nice improvement during this past 4, 5-week period in the markets that had been most affected by weather. Those markets, winter comes earlier and people start thinking about maintaining their car for winter earlier. Batteries that were fried, for lack of a better word, during the summer, fail as weather starts getting colder and the engines start getting harder to crank. We've seen good performance in that category as a result of weather. So yes, we've seen a sequential pickup in those markets that has been a little bit better than what we would have had in the markets that are in more moderate regions of the country.

I guess to follow up. Just thinking about the longer-term secular environment, which I think you touched on in your prepared remarks, particularly with the aging of the car park. Could you kind of talk about the sweet spot of the car park? How do you think that has evolved? Historically, you would have thought 7 -- cars aged 7 to 12 or somewhere thereabouts would be the sweet spot. Do you think that's extended? And what do you think that the spend per vehicle looks like outside of that? Because I think one of the concerns over the next few years is that we are going to have a lot of very old cars. And is the drop off after year '13 or '14 or '15, is it a 10% drop off, is it 20% drop off once you get out of that sweet spot and how do you think that evolves over the next couple of years?

Yes, well, what I would say to that is just a couple of 3 years ago, you would hear us say that the sweet spot was maybe 6 to 10 years. And as people have hung onto their cars longer, and I feel like the quality of the engineering and the manufacture of new cars has been recognized by consumers as they've driven these car at higher mileages, I think that's moved forward a little bit or extended a little bit. It's maybe, more 6 to 12 or something like that. I guess -- I don't really have any scientific data to answer your question and so I don't really know when we would see a drop off relative to an age of a vehicle. What I would say is that if you're driving a car that's your daily driver and it's your commuting vehicle, which in many of our markets, in Dallas/Fort Worth or Houston, you might have a 50 or 80-mile daily commute back and forth, not one way but both ways, to get to work and back. You've got to have reliable transportation. So if the car is 12 years old or 13 years old or 14 years old, you still have to do the primary things to maintain that car to drive it every day. Now, that doesn't mean that you're going to be fixing a rough spot that comes up or fixing the seat that might have worn through or fixing a cracked dash or something like that, because there's going to be some things that caused the car to maybe not look as good as it did when it was new or 5 years old new 6 years old, but still the mechanical part of the car has to work well for it to be reliable transportation. And in many cases, these cars are not only the commuter cars, they're the cars that families use for vacations and weekend outings and things like that, so they have to be safe and well maintained. So I think the answer to your question is yet to be seen, but we view it as being unlikely and very difficult for a consumer to just say that, because the car is 13 or 14 years old, they're going to stop maintaining it. It just doesn't work.

And your next question comes from the line of Bret Jordan. Bret David Jordan - BB&T Capital Markets, Research Division: Quick question, just to follow-up. I know you mentioned private label and the opportunity there going forward and the opportunity to grow the gross margin through that. I know a couple quarters ago, you were saying private label was running 33% of sales. Just wondering if you could update us on that number.

It still about that. It's not grown. We've not seen a significant growth past that. A big part of our private label, the amount of product we sell private label is the amount of product we offer. As we add to that offering, our percentage of sales increases. Because in many cases today, especially a DIY consumer, they're going to buy the lowest priced product you have in some cases. So as we expand our private label offering in various product lines, that grows. And we haven't made any material changes here in the last couple of months to our private label offering, although our plan is to continue to look for opportunities to establish private label brands that are recognized as high-quality, national brands offered exclusively by our company to expand our private label offering. And that allows us to be more competitive on the DIY side, competitive on the do-it-for-me side and, at the same time, expand our gross margin through better acquisition and just better gross margin on the product sale. Bret David Jordan - BB&T Capital Markets, Research Division: And then just a quick follow-up. Is there -- with private label, is there a long-term run rate that you're eventually looking to get to? Say, 40% of sales or so, or is this just a quarter-by-quarter, year-by-year measure that you're going to look to expand on?

Yes, there's no plan to get to a certain percentage. Really, it's not even quarter to quarter or year to year, it's by product line. We assess this by category, by product line and decide how our company can best go to market with that product. And if that means that we're best served to expand into a private label product or expand an existing brand private label offering, we do that. In many cases, some of the brands we offered are very much preferred. And some of the brands we offer aren't necessarily always available in a private label and, for that reason, we opt to carry a branded product because both DIY consumers and do-it-for-me consumers prefer the branded product because of the recognition of the high quality of that particular part.

And your next question comes from the line of Michael Lasser of UBS.

This is around the outlook for your cost structure. If we assume that the environment remains in a relatively slower period for a longer length of time, how do you feel about growing your cost structure at a slower pace? What comp rate do you think you need to leverage at this point? And if you pare back -- continue to pare back on some of these expenses, do you jeopardize some of your sales at that point?

When we look at our cost structure, as Ted talked about during his prepared remarks, we've always been very stringent on making sure we get a good return on all of our expenditures. So we don't have a lot of programs that we could do without. If we did, we wouldn't have them to start with. So we're pretty tight on expenses. But as Ted talked about, we manage it over time. We don't want to knee-jerk customers in that service, but we want to make sure we're matching up to what the sales environment is. So given -- if we look at the fourth quarter, for example, and we say, sales are going to be -- we're pretty confident are going to be in the 2% to 4% range, we'd build our cost structure around that, but that starts in the beginning of the third quarter. So to the extent that we stay on a slower but stable environment, which we're optimistic it'll improve, we can get to a pretty even SG&A percentage at 2.5% to 3% based on 190 new stores.

So that's the level of comp that you would need to lever?

That's to be flat, that's what you would need.

To be flat. And for the incremental inventory that you're currently putting in the stores, do you think that there's already been a sales lift associated with that incremental inventory and can you quantify it?

It's a minor lift. These, obviously, are not the fastest moving items that we deploy. The fastest moving items were already in the stores. These would be the -- kind of the next layer of movement, and they've not been there long enough to generate a material sales lift. And we don't have it quantified at this point, so we wouldn't be able to speak to anything but I can tell you that it's not -- it was not a material change.

One last quick one. There was commentary about the supply chain and comparing the DCs in the legacy versus the newer markets. Where, across the board, do you think you are in the efficiency of your supply chain? Are you 90% of peak efficiency, 80%? Where do you think that is?

Well in our existing -- the core O'Reilly markets, we're pretty darn efficient and there's not much left there to gain. In some of the expansion markets, we do still have some efficiencies to gain. Some of those DCs run a little higher expense to sales ratio than what we would like. And as we continue to grow sales from those markets, we'll further lever those expenses. I don't have a number for you. I know that our overall distribution expenses, we're pretty pleased with that rate that we're currently at as a percent of our sales. Our Senior VP of Distribution, Greg Johnson, who is not here, he'll tell you that we still have opportunity to increase that or to improve, decrease the expense next year and, hopefully, the year following. So we're working to do that. And we do have some distribution centers that aren't operating as efficiently as we would like, and those DCs we see as opportunities.

At this time, we would like to turn the conference back over to Mr. Greg Henslee for closing remarks.

Thanks, Paula. Before we end the call today, I would just like to reiterate our belief in the solid long-term growth potential for our industry. Total annual miles driven in the United States remains nearly 3 trillion, the light vehicle population is growing and the overall age of the vehicle population continues to increase. All of which provide a solid foundation for future demand. We remain dedicated to our long-term strategy of having the friendliest and most knowledgeable parts professionals in all of our stores, supported by the most robust store level inventories and availability of hard-to-find parts. We are committed to providing top-notch customer service to all of our professional and DIY customers every day. I'd now just like to thank everyone for their time today. We look forward to reporting our fourth quarter results and our full-year results early in 2013. Thanks.

This concludes today's conference. You may now disconnect.