Welcome to the O'Reilly Automotive Incorporated Fourth Quarter Earnings Release Conference Call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Mr. Tom McFall. Mr. McFall, you may begin.

Thank you, Vanessa. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our fourth quarter and full year 2014 results, our outlook for the first quarter and full year of 2015, and after our prepared comments, we'll host a question-and-answer period. Before we begin this morning, I'd like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2013 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I'd like to introduce Greg Henslee.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts Fourth Quarter Conference Call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Jeff Shaw, our Executive Vice President of Store Operations and Sales. David O'Reilly, our Executive Chairman; Ted Wise, our Executive Vice President of Expansion; and Greg Johnson, our Executive Vice President of Supply Chain, are also present. I'd like to begin our call today by congratulating Team O'Reilly on another great quarter, which closes out a very successful year. Our team's ability to consistently grow market share by providing excellent customer service, day in and day out, is highlighted by our comparable store sales results, which exceeded 5% each quarter of 2014 and finished at 6% for the full year. Our goal is not just to grow our market share, but to grow it profitably. And again, our team's commitment to customer service drove exceptional results in 2014, as we set record high quarterly operating margins each quarter of the year. These consistently outstanding results are the result of the hard work and dedication of each of our Team Members, and I would like to thank our team for their relentless commitment to our ongoing success. As we have seen the past 3 quarters, undercar repairs such as brakes, driveline, chassis and ride control were key contributors to our strong 6.3% comparable store sales increase for the fourth quarter, which exceeded our guidance of 3% to 5%. The strength in undercar categories, along with general strength in all hard parts categories, drove comparable store sales of 6% for the year, which exceeded our guidance from the beginning of the year of 3% to 5%. For the year, we increased sales by $567 million to $7.2 billion,…

Thanks, Greg, and good morning, everyone. I'd like to begin by congratulating Team O'Reilly on another outstanding quarter and year. Our industry-leading 6.3% fourth quarter comps and full year comps of 6% wouldn't be possible without the excellent, consistent customer service you provide our customers. Your relentless focus on outhustling and outservicing our competitors drives our success. And I'd like to thank you for your hard work and commitment. Today, I'm going to discuss our operational results for the quarter and year and provide color on some of our operational initiatives. SG&A levered 23 basis points for the fourth quarter and 28 basis points for the year, driven by our strong comp performance. At the beginning of the year, we anticipated per-store SG&A would increase around 1.5% for the year, but actual results for the year were an increase of 3%. Early in the year, we made the decision to be more aggressive in our store staffing to capitalize on the favorable industry trends. As we've discussed on this call many times, we staff our stores to provide excellent customer service and to fuel the growth of our business. Based on our industry-leading comparable store sales results, we feel this decision to be more aggressive was warranted. When we look at our business, we know we have a tremendous opportunity to improve our average DIY per-store volumes. I'd like to touch on 2 of the items we feel helped drive our strong DIY results for the year and feel that we will continue to drive our business going forward. First, as I mentioned, we were aggressive in our store staffing hours, while also increasing the flexibility of those hours. This allowed us to provide better levels of customer service, especially on nights and weekends, which are high-volume DIY times. Second,…

Thanks, Jeff. I would also like to thank all Team O'Reilly for your continued dedication to excellent customer service, which drove our outstanding results. Now we'll take a closer look at our results and provide additional guidance for 2015. For the quarter, sales increased $143 million, comprised of $100 million increase in comp store sales, a $42 million increase in noncomp store sales, a $2 million increase in noncomp nonstore sales and a $1 million decrease from closed stores. For the year, total sales are $7.2 billion, which represents an annual increase of 8.5% over the prior year and finished at the top end of our initial revenue guidance of $7 billion to $7.2 billion. For 2015, we're establishing our revenue guidance at $7.6 billion to $7.8 billion. Our gross margin results of 51.4% this year were very strong, improving 73 basis points, as we were very successful in reducing acquisition costs. However, the impact of our LIFO accounting creates the need for additional color in this area. Our success in reducing our acquisition costs over time exhausted our LIFO reserve, with the result that additional cost decreases create onetime noncash headwinds to gross margin as we adjust our existing inventory on hand to the lower cumulative acquisition cost. For the year, our gross margin of 51.4% included the LIFO headwind of $41 million. As Greg previously mentioned, our gross margin guidance for 2015 is 51.8% to 52.2%. This guidance assumes that we'll not experience additional LIFO headwinds. Said another way, we expect acquisition price decreases and increases to be about the same in 2015. To the extent we are successful in gaining net reductions, we will face more LIFO headwinds. However, if this does occur, we would expect a much smaller impact than we experienced in 2014 and our…

[Operator Instructions] And we have our first question from Seth Basham with Wedbush Securities.

My question revolves around SG&A you leveraged for 2015. It seems like you've got the store level staffing dialed in properly. Your guidance for 2015 embeds only about a 10 basis point improvement in the SG&A rate. Why don't you expect better leverage if you expect comps to be 3% to 5%?

Tom, you want to take that?

Okay. Seth, what I would tell you is that we're looking at good leverage, but we're also looking at making some investments in our business, both from primarily around the technology area and communication to our stores. So we have some additional expenses we're going to take on there to ensure that we're providing a customer experience that meets the needs of our customers.

Got you. Can you provide any more clarity around that? What particular investments are you referring to?

Our ability to enhance our systems and install new systems at a faster rate.

And additionally, the telecom ability to move information, video, things like that to our stores in a more expedient fashion that will cost us a little more as we set those up and move away from regular copper phone lines to voice over IP technology and things like that.

Our next question is from Michael Lasser with UBS.

You outlined a lot of the initiatives that help contributed to your above average growth, your comp growth that you saw in 2014, things like the weekend parts availability, weekend store hours, the labor investment, I'm assuming the loyalty card helped. How far, if you look at all of those initiatives, how far into -- have you really harvested the benefit? So another way of thinking about it is, now how much more can they contribute in 2015? And then, if they're in the eighth or ninth inning, are you just going to be more subject to the ebbs and flows of the overall market demand?

Well, Michael, to tell you, I guess from my perspective, there's really never been a year in the 30-plus years I've been with the company that we didn't have initiatives to improve customer service and improve our sales results. The things we talk about now are some things that we've done the last few years, which were a little bit changed from the past relative to maybe some reservations we had about our relationships with our professional customers and how aggressive we could be on the retail side. And in all those things, we feel like we still have a lot of room ahead of us from an improvement standpoint. So I would say, we're in the early innings in most of those things. Our rewards program, there's a lot of things that we can do to tighten the relationships that we have with our customers. Staffing in a retail environment like we're in is always an ongoing challenge and one in which we feel like we always have opportunity. So I think we still have a lot of room from -- ahead of us. And as we move to this year, we'll be implementing new ideas and new things that we feel like will improve our ability to compete and grow our comp store sales.

Okay. And my follow-up question, Greg, is when you look at your professional business, is most of the growth coming from existing accounts? Or are you increasing the frequency and the penetration of -- or are you getting more deeply -- more deeply penetrated within your existing accounts, new or existing?

That's a hard thing to measure, obviously, because we're growing as much as we are. I mean, but to answer your question as best I can, it's coming from both. We -- very seldom do you have a relationship with a customer that relates in them buying everything from you, because some things you might not have, you have to pick up or they may have a brand preference that maybe we don't have and they buy it from another supplier or just a variety of things. So we -- we're out there working every day to grow business with existing customers, and we're calling on customers that aren't buying from us, especially in newer markets. A lot of times when you start off a new store, you work on the low-hanging fruit first, the customers that are most likely to buy from us. And then over time, as we become more capable and we penetrate deeper in the marketplace, we start developing relationships with the customers. So it's both, but I don't have a number for you on which would be the biggest contributor.

Okay. And if I could just seek one last one in for Tom. Your stock has been a beast. How do you think about continuing to deploy capital back to shareholders through share repurchases when it's trading at the valuation level that it is? And would you consider other forms of capital return?

We discuss how we're going to return capital on a quarterly basis, and that's a pretty lively discussion. What I would tell you is that, we believe in our long-term growth projections and we'll continue to execute our buyback program in a prudent manner.

Our next question is from Simeon Gutman with Morgan Stanley.

Question on store volumes. So in the press release, if you do the math, the stores are doing about $1.7 million a box. If you just look at your mature store base, which I'm presuming is a bit higher than that, is there a significant spread between some of the better performing stores and the lower performing stores?

Yes. I mean, our biggest -- our highest volume store would be -- it's a real high-volume store, and it would be well above our average and well above even our heavy metro area averages. Our best-performing stores are typically in large metropolitan areas and take up a significant square footage, and most of them are hub stores or large inventory stores. So yes, there would be a significant spread between our average store and those larger stores.

Right, but I guess that's more a function of a location, it sounds, based on your response?

Yes. It's the location. It's where they're at. It's the number of shops around them. It's -- our strategy all along has been to position these stores where they're in a position where they can do a lot of DIY business. A destination for the DIY customer, yet close to the shops that would be most prevalent shops in the area. And then also some of our more -- our older stores or more rural stores, and they would, of course, be lower volume. So that factors into that too.

Okay. And my follow-up, can you talk about private label, particularly your focus in hard parts, like brakes and chassis? Are you making, I know -- we know you're making a push, but I think you're making a harder push into the hard part area, and can you talk about the kind of traction you're seeing?

Well, again, our private label products in the hard parts area anyway, the product itself, in many cases, is not much different than the branded product. They're very high-quality private label products, and our efforts are just to have a little more control of the way the product is managed, keeping it out of our competitor stores to some degree. But our private label strategy is a little bit different than many in that we're putting high-quality products in the boxes. In many cases we're using brands that are recognized, in some cases, by the customers, and especially the professional customers as being brands that have been prevalent at some point in the past. So -- and we do this very strategically and surgically, I would say. We're very careful about what products we put in private label boxes. And very simply, we carry many brands that are just not good brands to move into a private label box, because the brands are so prevalent and we have excellent relationships with many of our suppliers and simply want to support their brands. So some of the brands that we carry, right now I would say we'd never plan to move those into private label. But others where the brands aren't as prevalent and it makes sense for us to put them in our own packages, we do that, but with the key being that we're putting in the box a product that's of high enough quality that our professional customers would consider it equal, at least equal with the branded product that it may be competing with. And so it's a slow-moving strategy, but we're somewhere in the mid-30% range, if we include oils and so forth in our private label mix.

And our next question comes from Scot Ciccarelli with RBC Capital Markets.

Can you provide us a little bit more color on the gross margin expectations? I thought, Greg, you said one thing, and then, Tom, I thought it was a little what you said in terms of the LIFO. It's not clear to me if you guys were looking for improved supplier pricing? And then assuming that we are going to see some lower supplier pricing as part of the expansion expectations for '15, can you help us better understand where the rest of the gross margin expansion is coming from, just a little bit more color on that?

Our expectation is that we are not going to face meaningful LIFO headwinds in 2015. So the abatement of that is the major mover of our gross margin percentage. We also expect to see more historic incremental improvement in our ability to acquire products, our DC efficiencies, to be the remainder of the increase.

So on the DC side, though, Tom, like how much of the improvement is coming from, let's call it, falling gas and diesel prices on the distribution side? Because obviously, you guys run, I don't know, hundreds of thousands of miles, if not millions of miles, every year, kind of delivering product to stores and to customers.

Well, what I would tell you is that when we look at falling fuel prices, the major benefit we see is in the DCs. When we look at the stores, our expectation is we're going to run more deliveries. So we offset that rate increase with more miles. So the DCs are more of a fixed cost, so we do anticipate seeing some benefit. Our expectation is that gas prices are not going to stay this low for an extended period of time. When we look at DC efficiencies in general, the 2 main drivers there are reducing excess capacity, especially in the newer DCs, and leveraging those fixed costs, and then just as we grow store unit volumes, the bigger the unit volume, the more efficient the DC is in picking and distributing parts to them.

Our next question is from Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: First a follow-up to Scot's question. So is there a way to say, I don't know, diesel and gas prices are 3% to 4% of your -- of sales or some percentage of your cost base overall?

We don't comment on the portions of our DC expense. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. Fair enough. And then in the Texas market. Texas, you have an above-average exposure. I think 14%, 15% of your stores are in the Texas market. Has that been an outperforming market for you relative to the comp base over the past few years? And is there anything that you're seeing right now, as it relates to the exposure to the oil patch that makes you think that, that could be a below-average area for you going forward?

Texas has been a high-performing area for us for a long, long time. Recent, just from a comp percentage standpoint, because of our growth in other areas and the stores maturing in those areas comping at high percentages. From a percentage standpoint, I'd put it kind of middle of the road in our company. I think that there is enough growth in Texas, just with population growth in cities like Austin and DSW and other metropolitan areas, that if there is an impact from the gas prices and maybe some of that business or that work slowing down, down there, it's being offset by the population growth, and we've not seen an impact on our business yet. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. And then finally, in terms of how are you seeing -- are you seeing a DIY lift in your business because of receding gas prices? How is the consumer changing as the money is flowing into their pockets now?

Well, our DIY business has been good. For the quarter, our do-it-for-me business was a little bit better, but the DIY business was very good. It is hard for us to know the effect of gas prices on consumer behavior, although our DIY business was strong for the quarter and it's been pretty strong for the year. So I think that most would speculate, including me, that with gas prices coming down, it's going to be good for the consumer, and with tax returns coming up here before long with the decreased weekly spend on fuel that, that's going to be a good thing for our industry and other retailers.

Our next question is from Alan Rifkin with Barclays.

The first question relates to the DC capacity. With 800 stores still out there, can we rule out a new DC both in 2015 and '16? Will 2017 be the first time we see another DC added?

No, you can't rule out a new DC in 2015 and 2016. We would -- we haven't purchased property yet, but we are in a process of planning our expansion. And at the point that we have purchased property, we'll announce where our next DC is. But I would speculate that you can expect an opening in 2016.

Okay. Greg, could you maybe provide some commentary on the acceleration of the pro business in some of the newer markets, particularly Florida and the Northeast, vis-à-vis Boston?

Well, in the -- I'll start with the Northeast. Those are typically or, generally speaking, the VIP stores, although we have put a few new stores up there. Those are doing great. And we've -- it's been a big transition up there with the stores having previously been operated as VIP with shops attached to them and I think most customers viewing stores as purely retail stores that do both service and parts. And then, of course, we've had the headwind of convincing some of our professional customers that we're not part of VIP and that we're not their competitor and that we are a great supplier-partner for our professional customers. So this past year has been a good year for us and we've comped really well on the -- in those stores in general, and a big portion of that comp has been on the do-it-for-me side. And in Florida, we've been very fortunate as we've grown down there to have had a incredibly strong team of individuals down there that are very good on the professional side of the business. And I would say that our new store growth down there, year 1, year 2, year 3, a bigger portion of our sales in those stores has been on the do-it-for-me side than would be typical because of the strength of our team down there on the professional side. So we've been very pleased with our growth on the professional side down there.

Okay. And one last question, if I may, on the guidance. So you've just had your best EBIT margin growth quarter in a number of years. You've had 6 consecutive years of 21% earnings growth or higher. You're guiding to the midpoint Q1 of 19% earnings growth. As we look at your guidance for full year 2015, the midpoint would suggest only 12% earnings growth. Is that just conservatism on your part? Or do you see something out there in the macroenvironment in the final 3 quarters of this year?

Alan, this is Tom. When we look at the fourth quarter expansion and the first quarter expansion and the year-over-year results, you've got to remember that we've got significant LIFO charges fourth quarter of 2013 and first quarter of 2014. So when you look at the year-over-year, I'd encourage you to look at the run rate of those. The second thing I would tell you is, we have tough comparisons this year, and if you look back at -- and we feel like our guidance is appropriate. If you look back at last year, I think you would find that our guidance and the growth ratios you talked about are similar. We're going to go out there and try to profitably grow the business again in 2015. But we feel like the guidance we've given, reminding everyone that it doesn't include any additional share repurchases, is appropriate.

Our next question is from Daniel Hofkin with William Blair & Company. Daniel Hofkin - William Blair & Company L.L.C., Research Division: Just a couple of follow-up questions. I guess you may have addressed this earlier. I popped off the call momentarily, but the comp kind of in the current quarter, if you will, and your near-term outlook, you've got gas prices as a tailwind and perhaps you have a more mild winter as a headwind year-over-year. I'm just curious how you see that mixing out right now, which is the dominating factor? That's my first question.

Well, we, of course, have the -- as you said, the tailwind of lower gas prices, which should be good. We also have the tailwind of unemployment, which is lower and down, which is good both from a consumer pocketbook standpoint but also in our business from miles driven standpoint as commuter miles increase. As we said throughout last year after we had the tough winter last winter, it's hard to ever really know the impact that has on your business. Although we did see, by category, some of the categories that we would speculate to be affected by harsh weather performed very well, and they continue to. Our business, so far this quarter as I said, has been good and we see no reason for that to change. I think the thing that we all need to keep in mind is that the car population being driven in the U.S. today is an older population. And these higher mileage cars, while they're very reliable from a engine, transmission, differential or transaxle perspective, and they're capable of being kept on the road for a long time, they still require maintenance, and at higher mileages they require more maintenance. And these aren't catastrophic mechanical failures that would cause the car to be retired, but they are things that can be reasonably expensive. So I think that those things are contributing to our industry's growth. And I think part of that, part of what we all saw of last year, when we had a relatively strong year was not purely weather-related; it was vehicle age related, combined with the weather, which is helpful. So it's hard for me to predict the impact of the consumers having more money in their pocket as a result of the gas prices and employment being a little better and the effect that maybe a milder winter so far, we still have some winter left, so we'll see what happens. But we're expecting -- we feel confident in the comp store sales range we gave for the year. And like I said, January has started off good for us, so we're hopeful that we'll continue on that trend. Daniel Hofkin - William Blair & Company L.L.C., Research Division: Okay. So fair to say that kind of your full year guidance, if you will, doesn't really assume much either headwind or tailwind from either of those factors, that's sort of your underlying view?

Yes. What we do every year is we go through on a by district, by region, by division basis and kind of evaluate where we're at in the marketplace and where -- what we would expect our growth in those areas to be, and then we kind of consolidate that into our plan. And we're comfortable with the 3% to 5% range for the year right now, all things considered, including those that we've talked about. Daniel Hofkin - William Blair & Company L.L.C., Research Division: Okay. And then just one further question, if I might. The -- thinking about the next year or 2 and potential sources of upside or downside. You've got, obviously, continued ramp from CSK, even though we're almost 7 years from the acquisition. DIY sounds like it has further legs to go. Which of those do you think is a -- maybe the bigger potential source of upside or at least continued tailwind, if you will?

Well, I think that we have a long way to go on the DIY side. If you look at the average per store that we do compared to our best DIY competitors, we have a lot of upside there. So I would say that's a -- that across the board, including the CSK, is probably our biggest contributor. One of the things that we talk about here a lot is how fragmented the professional side is. And while we feel like we've been a really good professional provider for a long, long time, it's very fragmented. And the percentage of the total business that we have, even though we feel reasonably dominant in many marketplaces, if you look at the whole U.S. and the percentage of the do-it-for-me business that we're doing, there's a lot of upside there. So we see a lot of opportunity on both. So I think it would be hard for me to say that there's more opportunity on one side than the other or in CSK. I think that we're getting pretty reasonably mature out in the Western part of the country, but there's a lot of business out there that we don't have. I will say that the past couple of years our do-it-for-me business has grown a little faster than our DIY. And I think for reasons that have been discussed a lot in the past, relative to vehicle complexity and things like that, that we'll continue to see that trend. Although that trend is somewhat mitigated by our efforts to grow on the DIY side. So I guess what I would say is we see a lot of opportunity on both sides.

Our next question is from Michael Montani with Evercore ISI.

Wanted to ask, first of all, the loyalty program initiatives that you have. The last update I heard was that there's 9 million cardholders. Can you just refresh that number, give us a feel for the growth rates there? And then secondly, on hub stores, can you remind us where you're at today? And while there is no DC plans, can you talk about what you might have planned this year for hubs?

Well, our loyalty program is now above 12 million customers, and we continue to monitor how we're doing there, and those customers appear be very loyal to us and are some of our best customers, when you compare their purchases to the average purchases and so forth, so we're very happy with that program and plan to continue to enhance it. Our hub store strategy really kind of plays into our DC strategy, because typically where we put hubs is where we don't have DC service that would put us in a position to where we would have access in our spoke stores or regular stores to a larger inventory. I don't have a number as far as the number of hubs that we'll add this year, but we consistently add hub stores and evaluate markets where we might benefit from having access to a larger inventory, and our strategy for a long, long time, long before they were even called hub stores, we had these larger inventory stores that serviced other stores from a hot shot delivery standpoint. When a customer needed a part and we made it available through a hub. We've never used our hubs as replenishment. We've used them only for availability purposes on a same-day basis, and we'll continue to use that strategy, especially up in the Northeast as we expand and we move into markets outside of Boston, for instance, where we wouldn't be able to have enough same-day drops out of our Boston DC to those areas, which there's a very dense population up there. We will have -- have to have good access to inventory. So our strategy from this point forward will continue to be as it has been for a number of years, to use hub stores as a means of augmenting our coverage in markets where we don't have a distribution center.

Great. And just wanted to ask about acquisition cost and CapEx. On acquisition costs, Tom mentioned not to really anticipate further material reductions there. I guess I was a little surprised just because of the AP-GPI deal and consolidation between Federated and Pronto! as well as declining commodity costs and potential FX benefits if you're sourcing in dollars. So can you guys just help us understand kind of what some of the offsets are that we're missing on that front? And on CapEx, just thinking about the 2 to 3 DCs I think that you guys had either opened or retrofitted this year, thinking maybe $30 million, $40 million a pop kind of rolling off CapEx, but yet the total should actually increase next year. Maybe just help us to understand the cost to build a store that you own versus one that you would lease?

Okay. On the acquisition costs, we would expect to make some improvement on our acquisition cost. We've made a lot of headway over the last couple of years. In relation to some of these -- other consolidations within the industry, they are not sharing their acquisition price changes with us, but we feel like we have, for our volume, very competitive pricing. So we're looking for a more moderate improvement there. In relation to LIFO, we aren't expecting a large, large number. So just some normal acquisition cost improvements. Of course, we'll continue to work at getting the best parts for the best prices to provide value to our customers.

On the CapEx side, the thing that I would remind you is that within the DC development that we opened this year, that stretches back to 2013, when we were purchasing and fixturing those facilities. So it didn't all hit in '14. The cost of a DC can vary, depending on the size and the location, in the $30 million to $50 million range.

Okay. And just the cost of the leased store versus owned store, because you mentioned that was an offset. Can you just give us some additional clarity on what's actually increasing this year?

We're about 1.3, 1.4 for an owned location and the difference would be primarily -- we might be in the 400,000 for leased space assuming it was a white box space.

We have reached our allotted time for questions. I will now turn the call over to Greg Henslee for closing remarks.

Thank you, Vanessa. We'd like to conclude our call today by thanking our entire team for the outstanding year. We're very proud of our strong 2014 results and remain extremely confident in our ability to continue to aggressively and profitably gain market share and are focused on continuing our momentum into 2015. I'd like to thank everyone for joining our call today. We look forward to reporting our 2014 -- our 2015 first quarter results in April. Thank you very much.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.