Welcome to the O'Reilly Automotive, Inc. First Quarter 2018 Earnings Conference Call. My name is Jenny and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Tom McFall. Mr. McFall, you may begin.

Thank you, Jenny. Good morning, everyone and thank you for joining us. During today's conference call, we will discuss our first quarter 2018 results and our outlook for the second quarter and full year of 2018. 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 estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend, 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, 2017 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 first quarter conference call. Participating on the call with me this morning are our Co-Presidents, Greg Johnson and Jeff Shaw; as well as Tom McFall, our Chief Financial Officer, and David O'Reilly, our Executive Chairman is also present. Hopefully, everyone has had a chance to read our first quarter earnings press release last night. I'll make just a few brief comments on the first quarter results before turning the call over to Greg, Jeff and Tom. I'd like to begin by congratulating team O'Reilly on a solid first quarter and by thanking our team of over 76,000 dedicated team members for their continued commitment to providing the excellent service that earns our customers' business every day. Our team was able to deliver a solid comparable store sales increase of 3.4% and a 28% increase in earnings per share in the first quarter, both of which were above the mid-point of our guidance ranges and are a testament to the relentless focus of our professional parts people on taking outstanding care of our valued customers. I'll let Greg provide more color on our results and outlook for the remainder of the year during his prepared comments. But I will add that we were pleased with our start to the year and remain confident in the health of our business and our team's ability to provide industry-leading customer service and drive profitable growth in 2018. As we announced in February, Greg Johnson will be promoted to the position of Chief Executive Officer in conjunction with our annual shareholders' meeting on May 8, and I will continue my career with O'Reilly both in an executive role and board member as Executive Vice Chairman subject to election by our shareholders. I have…

Thanks, Greg, and good morning, everyone. I'd like to begin my comments today by congratulating our team on a solid start in 2018 and thanking them for their continued dedication to providing exceptional service to our customers. As Greg mentioned, this unwavering commitment to customer service drove comparable store sales and earnings per share results, which were above the mid-point of our guidance. And we're very well positioned to continue to drive profitable growth throughout 2018. Now, I'd like to provide some additional color on our first quarter comparable store sales results. Both our professional and DIY sides of the business were positive contributors to our comparable store sales growth with professional performing better, as we saw strong ticket count growth on that side of the business in the first quarter. Average ticket continues to be a strong contributor to our comparable store sales increase driven by the increasing complexity of vehicle repairs, a favorable overall business mix and continued effective pricing management, which benefited from some inflation on same-SKU pricing, primarily on seasonal items, similar to what we saw in the fourth quarter of 2017. On a category basis, we saw strength in winter-related categories throughout the quarter in most of our markets, partially offset by some pressure late in the quarter for typical spring maintenance categories as a result of the continued cool, wet weather we experienced much across the country. When we look at our sales progression during the quarter versus our expectations, our comparable store sales increase was consistently solid throughout the year with the best performance realized in January as we benefited from normal winter weather. As winter extended well into the quarter, we saw some pressure from the delayed arrival to spring at the very end of our first quarter but in aggregate, March…

Well, thanks, Greg and good morning, everyone. I'd like to echo Greg's comments and thank our team members for their hard work and dedication to providing top-notched customer service. Our team's high level of dedication was more apparent than ever this past quarter as we experienced a normal winter after two years of mild winters, and our team members battled the elements to keep our stores open to take care of our customers as many of our stores experienced multiple rounds of inclement weather. We certainly welcome the sales demand created by the typical winter weather but without our store team's effort to keep our stores open for our customers and our DC's team's hard work in completing their routes and keeping our stores in stock, we wouldn't have been able to capitalize on this demand. As significant as the sales we pick up is the lasting goodwill that we earn from customers when we're the only parts store in town able to meet a customer's critical needs during bad weather. Now I'd like to spend a few minutes discussing our SG&A results for the quarter. For the first quarter, we de-levered 34 basis points with an average SG&A per store growth of 2.7% which was driven by the portion of the tax savings that we're allocating to incremental operating expense dollars in 2018 to further enhance our best-in-class customer service. The incremental investment in the first quarter consisted primarily of enhancing our team member benefit plans and was in line with our expectations. We remain confident in the opportunities we have to strengthen our industry leading customer service through redeploying a portion of the tax savings and we continue to expect to follow the plan that we outlined on our fourth quarter 2017 conference call. We had some other…

Thanks, Jeff. I would also like to thank all of Team O'Reilly on a solid first quarter. Now I'll take a closer look at our quarterly results and update our guidance for the full year. For the quarter, sales increased $126 million comprised of $72 million increase in comp store sales, a $53 million increase in non-comp store sales, a $2 million increase in non-comp non-store sales and a $1 million decrease from closed stores. For 2018, we continue to expect our total revenues to be $9.4 billion to $9.6 billion. As Greg mentioned earlier, our gross margin was up 17 basis points and benefited from the lower LIFO charge, which totaled approximately $1 million in the first quarter of 2018, compared to a charge of $7 million in 2017, with the lower charge driven by price decreases from vendor negotiations, mostly offset by commodity cost increases. We expect to see a LIFO charge in the second quarter of around $5 million, but our actual results will be driven by our ongoing negotiations with suppliers and potential cost inflation. The Tax Cuts and Jobs Act of 2017 had a dramatic impact on our first quarter earnings and will continue to have a significant positive impact on our tax rate on a go forward basis. Our combined effective tax rate for the first quarter was 22.9% of pre-tax income, which included a benefit from tax deductions for share-based compensation, which totaled approximately 1.6% of pre-tax income. Excluding the tax benefit from share-based compensation, our effective tax rate of 24.5% was in line with our expectations. Our first quarter 2018 tax rate compares favorably to the tax rate of 31.2% for the first quarter of 2017 as a result of the lower federal tax rate, partially offset by a smaller benefit from…

Thank you. And we have a question from Matt Fassler from Goldman Sachs. Matthew J. Fassler - Goldman Sachs & Co. LLC: Thanks so much and good morning. My question relates to margin. Obviously, your sales performance was quite solid relative to expectations. I know that for Q1, it looks like EBIT margin was towards the low end of the range with sales above the midpoint of the range, and you seem to be guiding Q2 operating margin, just comes from a bottoms up perspective, to show a bigger decline than it did in Q1. So can you talk about how cost pressures or any other factors impacting margin are evolving as you move through the year?

Tom, do you want to take that one?

Sure. When we look at our operating margin guidance, just for the full year, when you look at the balance of our sales, the first quarter is the lowest average daily volume based on the seasonality of our business and we have a relatively high fixed cost business model. So that's why you see us at the lower end of our range. Typically, the second and third quarters are higher operating profits because of the higher sales dollars. Matthew J. Fassler - Goldman Sachs & Co. LLC: And can you talk about how factors like shipping, for example, whether it's diesel or freight rates, et cetera, are evolving relative to expectations, or are they intensifying, or have they leveled off as you think about the remainder of the year?

When we look at those, we called that out on our fourth quarter call that our expectation was we were going to see pressure in those areas and that's why we wouldn't get more leverage out of our DC cost on higher sales and those costs have been in line with our expectations thus far this year. Matthew J. Fassler - Goldman Sachs & Co. LLC: Got you. Thank you so much for that.

And our next question comes from Michael Lasser from UBS.

Good morning. Thanks a lot for taking my question and Greg, congratulations again on taking a step back or step up. My question relates to your commentary around quarter-to-date trend in the second quarter. You kind of went to lengths to talk about some of the weather impact and softness in the DIY business. So is that – are we to assume that it's worse so far quarter-to-date than you saw in March when there were similar weather impacts that impacted the DIY business?

You know, Michael, we're not going to share any details over a very short period of time thus far in the quarter. But as we said, in our prepared comments, weather has impacted us late in the first quarter, leading into the second quarter. And at the end of the first quarter, our DIFM business continues to be strong and in the markets where we had good spring-type weather, our DIY business was strong. In markets where we had and where there were a lot of weekends, during the month of March that the weather was okay, and in the weekends, resulted in snow and cold weather again, which impacts the DIY side of our business. So what I'll tell you is this, that what we've seen thus far in April supports our 2% to 4% guide and we feel good about our guidance for the quarter.

Okay. My follow-up question is on the longer-term margin outlook for the business, there's lot of concerns about price transparency and the potential for gross margins to come down. We have seen that your operating margin will be under pressure due to some investments. So can you just provide a bit of a framework on how we should think about, once we get past this year, what is the longer run margin outlook for O'Reilly to look like?

Michael, this is Tom. I'll take that one. We've given guidance for this year, we think that when you look at the value proposition that our business provides, customers continue to be very strong and will be strong in the future. To give margin expectations beyond this year is not something that we typically do, but I would tell you that we remain very comfortable with the long-term opportunities for our business.

And comfortable wouldn't mean that you're not expecting it to go down meaningfully over time?

We think that our business model will remain similar as it has for the past decade. Obviously, retail continues to evolve, but we're comfortable with the value proposition that we provide.

Okay. Thank you very much. Good luck.

Thanks, Michael.

And our next question comes from Christopher Horvers from JPMorgan.

Thanks. Good morning and nice quarter. Curious, you talked about the DIY volatility at the end of the quarter, but could you shed some light on the commercial performance? Were trends relatively consistent over the quarter in an absolute sense or is that relative to your own expectations? And does the timing of spring tend to impact that side of the business as well as to people bringing their cars in for oil changes and tire changes as weather breaks historically?

Yes, Chris. I'll start that one and then I'll turn it over to Jeff, and see if he wants to add a little more color. But generally, what I'll tell you is across the country throughout the quarter, our DIFM was stronger than our DIY for the reasons we talked about in our prepared comments and what I said earlier. From a weather perspective, because most of our DIY customers do the repairs outdoors, in their driveway, what have you, they're more susceptible to weather than the DIFM customers. DIFM customers, the shops can do the work no matter what the temperature is, no matter what the level of precipitation is. So the DIFM side is less dependent upon weather or contingent upon weather than the DIY side. Jeff, do you want to add something to that?

Yes. I would say that we look and looking back at 2017, our professional business was just really soft throughout the majority of the year, and we knew at some point it had to pick up, which we started seeing that in the fourth quarter. And those trends continue well into the end of the first quarter. And there's no doubt that the more normalized winter weather benefited our professional customers and that's kind of carried through. They're not near as impacted, as Greg said, by the cold spring. But we're pretty excited what the rest of the year holds as far as, hopefully, some pent-up demand from the more normalized winter and the longer-term demand created by that. I was reading an article the other day on potholes. I think it was a AAA article. And it was talking about the damage that's done, I think it was like $3 billion of damage that's done annually from potholes. Obviously, that would be more the case with the kind of winter that we've had. And the average repair is somewhere in the neighborhood of $300. So we'd hope to see some more of that throughout the remainder of the year.

That's a great segue to my follow-up, which is what do you – from an evidence point that the weather and the car park thesis, like what are you seeing in undercar suspension, brakes, that sorts of demand that would support the view that there should be a good lag impact from the weather or maybe that's just too early?

Yeah, Chris, it's really playing out exactly as we would've thought. When you look back in January, early in the quarter, where we had the biggest impacts of winter weather, we were selling categories you would expect to sell. We were selling winter-related, weather related categories, lighting and batteries and wipers, things like that, some rotating electrical spiked back in January. And then as you move through the quarter, and we get into March where you typically see warmer weather, and you see the long-term effects of the harsher or more normal winters that we've had and the potholes that Jeff spoke about later in the quarter, the encouraging part is on the DIFM side of the business. We started to see growth come back in steering, suspension, chassis-type lines, which is what we would typically in the spring, and we expect that to follow on the DIY side as the weather cooperates.

Excellent. Best of luck, guys.

Thanks.

And our next question comes from Bret Jordan from Jefferies.

Hi, good morning guys.

Good morning, Bret.

Could you talk a little bit about regional performance? I got on a couple seconds late, so maybe it was in the prepared remarks. But maybe talk about market strength versus weakness and maybe what the spread was between the best and the worst markets?

Sure. Jeff, you want to take that one?

Well, really, it's about what you'd expect. I mean, early winter was good in most markets and then as we moved kind of later into the quarter, the markets that weren't as affected by the cold snowy wet weather performed better than the markets that were affected from kind of the lingering winter. As Greg said earlier, I think in all markets where we've seen normal spring-type weather, our business has been pretty decent.

Okay. Another question on your inflation comment, I guess some of the same SKUs that are going up, and we saw it in batteries, I guess, in the first quarter. There were some supply shortage and pricing went up. Have those inflationary prices held? And I guess, from an inflation standpoint from your suppliers, what are you hearing from folks that are seeing labor cost coming up in Asia and metals costs and factoring costs going up? What's to talk in the supply chain about inflation on a full year basis?

Yes, Bret, there's talk about inflation, there's talk about tariffs. We're talking about all those things. From an inflation standpoint, we have seen a bit more inflation on the input side this quarter than we've seen in previous quarters. Most of it is commodity driven, but we've started to see some. We've been able to mitigate most of that by passing that along to end-user pricing.

Okay, great. Thank you.

You bet.

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

Hi, guys. Scot Ciccarelli. I have a question about kind of the commercial versus DIY, I guess. So commercial outpaced DIY. The question is really, would you assume that means the worst of maybe the car park issues are behind you at this point, or do you think that performance delta was really just driven by weather and based on what you see by region, by product category, it really suggests weather was the primary reason we saw that difference?

This is Tom, Scot. We talk to the fact that we really felt like in 2018, the light SAAR years entering the entry port (00:33:47) of our business, which tends highly to the professional side of the business, was going to stop being a headwind and flatten out. Is what our numbers showed us. So we think it's a combination of that vehicle population dynamic, along with weather that's helping drive that professional business to better results and have more opportunity on that side of the business than we had last year.

All right. So hard to delineate at this point? And then the second question is, with the debt leverage ratio approaching your target, should we assume interest expense largely flattens at the current run rate? Or should it continue to come down?

Well, we would expect our interest rate expense to be relatively flat to the first quarter to the extent that we don't issue additional bonds or incur additional debt. So I would plan for it to be the same.

Got it.

When you look at our guidance, we don't plan for additional debt or additional share repurchases in our guidance.

Understood. Thanks, guys.

And our next question comes from Mike Baker from Deutsche Bank.

Hi, guys. Longer term picture question here. Just has something changed in this business, in that you're guiding to 2% to 4% this year, which is certainly better than last year. But weather and – or I should say, the winter was more normal, the car park is – the pressure there has peaked. 2% to 4% is a good number, but below the 4% plus that you guys generated for years. So what's changed bigger picture? Is it more competition? Is it less inflation? Is it less share opportunity? Or some other guys maybe have stopped bleeding as much? Just curious on your thoughts there.

Tom, do you want to speak to the guide?

Yeah. When we look at our guidance, we look at – we have some ups and downs in our business over the years and we've all been in the business for a long time and we're going to see years where comps, because of customer demand and vehicle dynamics, run higher and some like last year where it runs lower. And we feel 2% to 4% comp guidance is the prudent guidance to give. We delivered right in the middle of – slightly above that – middle of that range in the first quarter, and we're comfortable with our guidance for the second quarter and the full year.

And I presume you're not going to be talking about years beyond this year, so we can't – any color on whether that's sort of the right outlook longer term as we try to model out beyond the next three quarters or is that something that you talk about at a later date?

Well, we see – when we look at the demand drivers for our business, number of vehicles down the road, miles driven, where the population increases. We expect those drivers to continue to increase and drive demand in our business over the long term and maybe if you look at the AAIA, they look at 1% to 3% DIY growth year-after-year and a 2% to 4% on the professional side over a long time horizon, and we'd expect to continue to outperform the market.

Okay. One more if I could. This is for Greg Johnson. Any thoughts on – any big changes to the strategy? Maybe one thought, perhaps a little bit more aggressive M&A, tuck-in acquisitions, anything along those lines that you think the company will evolve towards under your leadership?

Mike, I think, we've got a very sound business model. We've executed on for years under David's leadership, under Greg's leadership. Market changes, retail changes, we'll adapt. Fundamentally, we're going to continue to do the same things we've done, which has been very successful for us. From an M& A standpoint, we continue to look for acquisition candidates, both inside and outside the U.S. borders. It's what we've been doing for a few years now and we'll continue to do those things. There'll be some change and we'll adapt to a changing retail environment, whether Greg's our CEO or I'm our CEO. But fundamentally, we feel like our business model works and works very well and I don't see any substantial changes.

Okay. Appreciate the color. Thank you.

And our next question comes from Greg Melich from MoffettNathanson.

Hi. Thanks. I wanted to step back just a little bit. I think you gave a lot of good information on the how the pro did better and was more durable. And it sounds like inflation is back at least a bit. But what is – we're growing transaction counts in the quarter, I mean, if you look at that comp, was there positive transactions and is that true in the DIY as well?

Ticket count grew more on the DIFM side as well as the ticket average on the DIY side. Growth was in ticket average.

Okay. So overall transactions might have been up 1%, and then the rest was ticket. Would that be a fair way to think about it?

Overall, ticket counts were slightly down.

Okay. And if we think about the growth from the basket was, how much of that would have been inflation versus, let's say, mix? I think you mentioned a lot of more undercarriage and those sort of higher ticket item parts.

Yes, it is more so. We haven't seen enough inflation to really move the needle on that yet.

All right. That's great. Thanks a lot. Good luck, guys.

And our next question comes from Liz Suzuki, Bank of America.

Hi, guys. So growth in miles driven has started this low. Is there any concern that consumer travel trends are changing in a structural way and that it could be a headwind for the auto parts industry broadly, or do you think it's more of a temporary impact from higher gas prices?

It's probably a temporary deal for gas prices. We've seen this trend before. As gas prices grow and as gas prices really grow over time, consumers will do a really good job of adapting to that and changing their budgets accordingly. When gas prices spike very quickly, sometimes that's not the case, but I feel like today, the miles driven is a result of slight increases in gas prices and we're watching that very closely. And frankly, we bake this into our plan. We've budgeted for a little higher gas price, fuel cost into our 2018 plan.

If I could add to that, Greg, in 2014, 2015, 2016, we saw average miles driven at the high end of the average range. So on a year-over-year basis, it's not growing as fast, but it continues to be pretty close to the long-term average and continues to be a driver of our business in solid positive territory.

Great. Thank you. And how competitive do you think the pricing environment has been for national brand products that you can find online or at Walmart or at other auto parts chains? And what percentage of your sales and profit do you think are in the more competitive product category?

Yes. I don't know about percentage per se, but we're competitive with our peers, our brick-and-mortar peers, absolutely. And then in most cases, we're competitive with the online retailers. There are certainly examples where online national pricing, someone will have it less than us and someone will have a higher price than us. But from a brick-and-mortar perspective, our national brand pricing would be in line with our competitors. And you know, most of our online business results in the transaction ending in our stores. We're driving more footsteps to our stores through our online business, and we get the consumer in our store. We have a very competitive product offering even when we have an online retailer that may have a lower price point on the national brand. We will have a comparable product often in a private label offering that would have an equal to or lower price point even than the lowest priced online retailers. Jeff, do you want to add to that?

Well, yes. I'd say that one other thing to remember is that the national brands would be more of our premium offering and that's what most of our professional customers prefer. And there again, with the professional customers, it's all about availability and how quick you can get it to the shop and help them turn their bays.

Great, thanks. It's very helpful.

And our next question comes from Carolina Jolly from Gabelli. A. Carolina Jolly, CFA - Gabelli & Company: Good morning, thanks for taking my question. Just one quick one here, it looks like you might have two suppliers consolidating in the near future. Do you have any thoughts on how that might affect the business, including, I guess, supplier incentives or availability to new brands?

Sure. I don't know about availability to new brands, but you're speaking of Tenneco acquiring Federal-Mogul. We've had a long-term relationship with both of those companies. Both of those companies have been good suppliers for us. We've got a great relationship with Tenneco. One of the things that we like about this acquisition is there's really no competitive overlap between the two product offerings. They're really complementary of each other, not competing with each other. So we feel like Tenneco's leadership will be good for the overall company, and we look for good things to come from that relationship. A. Carolina Jolly, CFA - Gabelli & Company: Great. Thanks.

And our next question comes from Chris Bottiglieri from Wolfe Research.

Hi, thanks for taking the question. I have a long-term strategic question I wanted to pick your brain on. A lot of your closest peers are attempting to evolve their DC strategies, using hub strategies, mega hubs, whatever you call them, cross docking. I believe you don't currently use mega hubs. Can you tell us more about the advantages and virtues of your direct from DC strategy and why or why not a mega hub strategy would make sense for O'Reilly? And just lastly, kind of like what are the trade-offs and what does all this mean for O'Reilly's market share in commercial?

Sure. I'll start this, and I'll let Jeff add to it as well. We started out really focusing on the professional side of the business where a lot of our competitors started out focusing on the retail side of the business. So since day one, we've had a very strong supply chain, a very strong DC footprint. Since day one, we have serviced our stores with replenishment and special order needs on a nightly basis. So the strength of inventory between a distribution center, SKU count and a hub store SKU count, the DC inventory is going to win out every time. Our DCs will have somewhere between 140,000 to 175,000 SKUs. Our hub stores will be closer to 70,000, 80,000 SKUs and our competitors may have up to 90,000, 100,000 SKUs in some of their larger hubs. But we kind of got that cost baked into our model. We've worked over several years to reduce our distribution cost and as a percent of sales. And we just feel strongly that having that overnight availability of inventory at a DC SKU level is a significant advantage over the hub model. Jeff, do you have anything to add?

Yeah. I'd just add that we've been delivering five nights a week to our stores for 60 years and back when it wasn't in fashion and people thought it wasn't the right thing to do, and it's panned out pretty well for us. Obviously, when you're in the DIFM side of the business, availability is absolutely key. I mean, getting that part to the shop and helping them turn their bays is really how you earn the business and keep the business. And honestly, to an extent, the more SKUs you have readily available, the more times you can say yes versus no. So we've always prided ourselves in a high-level of inventory availability. There again, we kind of meet what the market bears when it comes to service levels. I mean, it could be overnight in some rural stores, but it's up to seven or eight times a day in metro markets. It's really what the market demands to provide the service, to be able to earn the business and keep the business.

Another thing to add is that over the past years, we've also added weekend service out of our distribution centers.

Yes. And just one last item to note, we've run a significant hub network that augments our regional DCs, so availability is critical to success in our business and we feel like we do a great job at it.

Great. Very thorough. Thank you for the help.

And our next question comes from Matt McClintock from Barclays.

Yes, good morning, everyone. I wanted to follow-up on just the national brand conversation that we were talking about earlier. You have some M&A going on. You have a competitor that just put together a somewhat exclusive deal with a national brand and you're kind of seeing this in other segments of retail where one retailer will try to create an exclusive with a national brand to try to compete more effectively with another retailer. Are we seeing like an evolution in the way that your competitors think, or are we on the cusp of some type of new evolution in competition created by the suppliers, created by these brands? And just how do you think about this over the next several years being a potential threat to your business and your dominance? Thank you.

Its national brands versus private label has really evolved over time. We were – most of our business as recently as seven or eight years ago was national brands. National brands, there's a competitive component. To Jeff's point, most of our national brands are our premium product and we'll have in most cases, a good, better, best offering, at which point our national brands would be the best and we'd have one or more layers of private label under that. So we've evolved from mostly national brands to a mix, a healthy mix of private label and national brands, which allows us to compete with both brick-and-mortar and online retailers. So I think things continue to evolve. A lot of our private label brands are supplied by national brand providers. The example that you're speaking of in your example there, I think, that's a category where we have created a national brand. And some of our national brands that we own that are proprietary brands once were national brands like Precision, for example, or Murray air conditioning and we own the rights to those brands and they're now our private label brands. But in the case of other categories like, batteries is a good example, Super Start and BrakeBest in brakes have become essentially national brands. So we're happy with our strategy of having a healthy mix of good, better, best and mixing in private label and national brands.

Thank you for the color.

And our next question comes from Seth Basham from Wedbush Securities.

Thanks a lot and good morning. My question is on gross margin. Excluding LIFO on both periods, you saw your gross margin trending down year-over-year again this quarter. I just want to understand a little bit better if there's anything outside of your expectations impacting gross margin this quarter?

We have some puts and takes in gross margin that was within our guidance. When we look at our expectations, we had a little less inventory than we usually in the first quarter with and that had some cash headwinds to us, but we remain comfortable with our gross margin guide. And when we look at our POS margin without all the other items that go into it, we continue to be pleased with that.

Got you. And if we think bigger picture, there's been some conversation about price competition. We've also seen one of your largest competitors introduce a free overnight shipping offer for online orders over $25. Is that something that you think is material that you'll need to respond to? Or is it too small a piece of your business to matter?

Yes, Seth. It is a small part of our business, but we try to make sure we're competitive with our competitors in the products they offer and their programs like this. I saw something last week where one of our competitors was rolling out a test in select metro markets to provide overnight deliveries. I assume that's the one you're speaking to. What we worked on is, over time, and as a matter of fact, over the period of last quarter, we have expanded our shipping points to include all of our DCs and we'll also probably be layering on some of hub store locations. So a significant portion of U.S. households today we're able to touch overnight with UPS ground shipping. And we've got a mid-range to long-term strategy to leverage that and use that as a selling advantage online. So we may not mirror exactly what our competitors do from an approach standpoint, but we want to make sure we have a comparable service level.

Got it. And lastly, Tom, housekeeping question. LIFO expectation for the year now?

I'll have to look and get you. That number is probably in the, gosh, $10 million to $15 million range.

Thank you.

Again, to follow up on that, so that's highly dependent on what inflationary pressures we see.

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

Jenny, this is actually Greg Johnson. Thank you very much, Jenny. We would like to conclude our call today by thanking our entire O'Reilly team for your continued dedication to customer service in the first quarter. I'd like to thank everyone for joining our call today, and we look forward to reporting our 2018 second quarter results in July. Thank you.

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