Apr 30, 2009
Executives
Gregory Henslee - Chief Executive Officer, Co-President Thomas McFall - Chief Financial Officer, Executive Vice President, Finance Ted Wise - Chief Operating Officer, Co-President David O’Reilly - Chairman of the Board Matt Fassler - Goldman Sachs Alan Rifkin - Banc of America
Analysts
Stephen Chick - FBR Kate Mcshane - Citi Investment Research Scott Stember - Sidoti. Craig Kennison - Robert W.
Baird Anthony Cristello - BB&T Capital Market Brian Sponheimer - Gabelli & Company Jack Murphy - William Blair
Operator
Good morning, my name is Chantal and I will be your conference operator today. At this time I would like to welcome everyone to 2009 O’Reilly Automotive first quarter earnings release conference call.
(Operator Instructions) Mr. Tom McFall, you may begin your conference.
Thomas McFall
Thank you, Chantal. Good morning everyone and welcome to our conference call.
Before I introduce Greg Henslee our CEO, I’d like to read a brief statement. The company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contained within this 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 strategies, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions that are not guarantees of future events and results.
Such statements are subject to risks, uncertainties and assumptions including, but not limited to competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements.
Please refer to the risk factors section of the company’s Form 10-K for the year ended December 31, 2008 for more details. At this time, I’d like to introduce Greg Henslee.
Gregory Henslee
Thanks Tom. Good morning everyone and welcome to our first quarter conference call.
Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer, and Ted Wise, our Chief Operating Officer, David O’Reilly, our Executive Chairman is also present. I’d like to start off by thanking all, our team at O’Reilly for their hard work and dedication to our company’s success.
Our team is fully focused on providing the best customer service in our business and I think the great levels to service we provide continue to be evident in our comparable stores sales growth. I also like to thank our store installation and conversion teams, who have done such a great job setting up and opening our new stores and converting the CSK stores.
These conversion have been a very significant undertaking and I am extremely pleased with not only pace of the conversion, but the great job our teams have done turning each of these stores into an O’Reilly auto part store. Each of you are clearly exhibited our culture values and I think all the team member that joined O’Reilly is part of the CSK acquisition have been impressed with your work ethics and dedication to getting the job done right no matter how difficult the circumstance.
Currently we are nearing the end of the first phase of our CSK integration process having merged the stores that overlap with an existing O’Reilly store and convert it most of the stores that can be serviced by O’Reilly distribution center including the stores with in the reach of our buildings Montana DC, the Upper Midwest stores, the Chicago Metro area, West Texas and we are currently finishing up this face is a conversion with the stores in New Mexico that can be serviced out of our new Lubbock distribution centre. We have also completed the conversion of the Detroit distribution centre, the old [Marie’s] DC to our computer and material handling systems and have converted very stores supplied by that DC over to RPOs system Ted will be providing more detail about our new store openings as well as more specifics on the CSK conversions in a moment, but I want to say that we are very pleased with our progress on the integration.
We’ve made a lot of headway since July of last year, not only on the first phase of the store conversions, but also with our progress in building a stronger distribution network out west. We purchased existing distribution facilities in Southern California, Seattle and Denver and we have a location under contract in Salt Lake City.
These four new DC’s will augment the existing capacity we have in Phoenix and Dixon, California and allow us to fully implement the O’Reilly dual market strategy. We’ve also made significant progress with the change over inventory out west, which is progressing one product line at a time and we are very confident that we will continue to see positive results as we progress with these byline change overs and deployment of more customized inventories that focus on a good, better, best offering.
We’ve also integrated many of the headquarters functions into our Springfield head quarters, and we were making incremental progress on that front. At this point in the integration progress and I think I speak for our whole management team, when I say we are very pleased with the acquisition and are exited about what the future will bring as we continue our progress through this integration process, and put ourselves in a position to significantly grow our market share in these new markets.
Again Ted will be reviewing more details on all this in a moment. Sales grew nicely in the first quarter, is the stronger business trends we started seeing in the later part of ‘08, continued into this year.
Core O’Reilly comparable store sales grew at a strong phase and we are steady throughout the quarter. As you know we are not comparing the same number of days in the first quarter this year to last year, since last year was a leap year, that even with the loss of a day this year we generated very solid 8.2 comparable store sales in the core O’Reilly stores.
It appears that total miles driven are making incremental improvements, but it’s still down a little from last year. Although the day we get from the deportment of transportation is away with a couple of months behind.
Considering the continued poor performance of new car and truck sales, we have to assume that the average age of vehicles continues to increase and the miles driven on vehicles that are out of warranty and not an a lease program continues to grow. I also feel, as many of our commercial customers have expressed that many customers are very simply back to taking good care of their cars with the mindset that they will be driving them for a longer that they might have expected a year or two ago, and for that reason we are not seeing as much differed maintenances as we have in previous periods.
On a bike category basis, we are certainly seeing better performance in the alliance that are fairly not discretionary such as chasse and steering , starters and alternators and batteries. While more discretionary categories, like accessories and other more ancillary items are performing really as well.
The strong core O’Reilly comparable stores sales were very encouraging from many perspectives, but I think most noteworthy is the fact that many of our stores are relatively matured markets and are generating outstanding comparable store sales. As well as many of the stores in the Southeast will be overlapped with so many competitors.
I think our performance in the core O’Reilly stores speaks to the depth and strength of our store operations and distribution operation teams and so many in our management group focused their time and effort on the CSK integration. Both the core O’Reilly retail and commercial side to the business grew similar rates during the quarter driven by solid ticket count increases and to a lesser degree average ticket price.
The CSK conversions have been moving along at a strong phase and we are pleased with the results we have been generating. There is no question that the store have a lot of potentials as we put them back into the core auto parts business with better inventories in the stores supported by broad distributions center inventories, market competitive pricing and solid category management.
I’m extremely proud of the great job our newest team members have done weathering the disruption on these conversions, training on the new systems and beginning to build relationships with commercial customers and provide higher levels of service to our retail customers. Many of these stores have been generating negative comparable store sales in the high single digit and even double digits prior to the conversion and most are making the transition to positive comparable store sales within four to six weeks following the completion of the conversion.
At the end of 2008 we had 51 stores converted some have being converted right at the very end of the year. Of these 51 stores we had 27 stores that had been in operation for at least four weeks post conversion at the end of the year.
These stores generated comparable store sales of 4.3% for the first quarter on a calendar quarter basis. Since last year was a leap year, if we exclude the 29 of February 2008, from the comp base to get to a 90 to 90 day comparison they comp it 5.8%.
When we look at all 51 stores that were converted by year-end last year, many of which continue to comp negative into the first quarter as we expected it to do, they generated comparable store sales of 2.9% and on an equal number of days comparison 90 to 90 comp did 4.3%. Something’s to keep in mind relative to these conversions are; most of these stores are located in the Upper Midwest, which has significant sales volatility in the winter due to extreme weather.
CSK did a lot of price promotions at low margin around at right traffic and generate sales on ancillary merchandise. Many of these items such as motorbikes, accessories, car stereos and a long list of other imported items are not nearly as prominent in our mix.
Our plan is to put these stores back into the core auto parts business and with the greatly enhanced inventory breadth many at the key heart part or application part categories are now compiling in the double digits. This type of business does not require constant promotion, it’s sustainable based on the non-discretionary nature of the products and builds over time as world recognize as the provider that has the parts that our customers need and are staff by professional parts people.
It’s also important to consider that we’ve adjusted our pricing to be market competitive which required us to lower our selling price in the range of 2% to 4% as part of these conversions. As an example, comparing ticket counts in the 51 stores that were converted by the end of the year we generated 7.4% more tickets in the first quarter than we did last year, which clearly indicates the additional traffic and commercial transactions we’ve been able to generate by not only having the parts, but by being price competitive.
Again on a 91 day to 90 day comparison these stores generated a 2.9% comp. So we feel very good about our ability to transition these stores in the auto parts destination for the DIY business, as we work to build a solid book of commercial business in each store.
The non converted CSK stores generated comparable store sales of 1.5% comparing 91 days last year to 90 days this year. We are proud to have comp positive for the first two full quarters we’ve own CSK and few were gaining traction as we see incremental benefit from the inventory deployments and product line change over we’ve completed so far.
We are doing line changes in additions weekly in a very structured manner to avoid over loading the stores in the distribution centers and at the end of the quarter had completed almost 20% of the product line change overs and are on plan to complete the majority of the changes by the end of this year. There is no question that this acquisition has been a huge undertaking by our management team and we are very excited about our progress and the success we had to date.
We are on plan with our integration strategy and it work with each of our suppliers to deploy better category assortments and applications parts coverage in each of our new markets. Early on we expressed our potential to generate approximately a $100 million in an annual run rate synergy comprised of $25 million in operating cost savings and $75 million in merchandise cost savings.
I am very pleased to announce that we are well on our way to meeting those targets and feel very confident in our ability to clearly accomplish those synergies. Looking the second quarter and the remainder of the year, we have every reason based on our performance over the past several months as well as current trends to be reasonably confident that these current strong trends will continue.
Yet its hard to ignore the high level of unemployment and the potential that continues to rise and to create some headwind. All things considered we are raising our comparable store sales guidance to 3% to 5% for the core O’Reilly stores for both the second quarter and the year.
For the CSK stores we are going to maintain our 1% to 3% guidance for the second quarter and maintain our annual guidance 2% to 4% for the year as we believe will continue to gain traction as the year progresses. On a consolidate basis we would expect 2% to 4% comparable store sales for both the second quarter and for the year.
Again I want to thank all the team O’Reilly for their hard work during the first quarter as we worked to gain market share in our existing market and work to integrate the CSK stores and provide better levels of customer service in those markets. We are progressing well and look forward to great things to come as we complete these inventory change overs and establish our distribution network in the western half of the country.
I’ll now turn the call over to Ted Wise our Chief Operating Officer to provide more details on our continued expansion and the integration of CSK.
Ted Wise
Thanks Greg and good morning everyone. To start of I would like to give a brief overview of our expansion in the core O’Reilly stores for the first quarter.
We actually installed 58 new O’Reilly stores. However including the CSK O’Reilly store mergers which resulted in some store closure, we increased our net store count by 52 bringing us to total of 3,337 stores at the end of the quarter.
58 new stores were installed throughout 17 states with a top expansion area being in North Carolina with 13 stores. Texas with nine stores, Georgia with seven stores and Ohio with four stores.
In addition to the new stores we relocated four stores to new prototype building and had extensive renovations in nine other stores. All in all and especially considering being that map we change over plan going on in the CSK convergence store, this was an exceptional first quarter for our new expansion.
The upcoming quarter was to be a stronger one with approximately 54 new stores on the schedule. As previously stated our new store expansion will end up in the area of 150 new locations for 2009.
Our expansion will continue to be strong in the Eastern states in the Ohio valley area supported by the new DC in Greensboro, North Carolina, which is scheduled to open in the middle of May. The new distribution centre will start out servicing around 60 O’Reilly stores with capacity to service up to 250 stores.
The Murray Detroit distribution centre was successfully convert from the CSK system to the O’Reilly system last week and will continue to serve the 79 Detroit area stores. This DC has plenty of excess capacity and will play an important and necessary role in our continued store growth in Michigan and the Ohio area.
Service of a group of existing store will be moved to new Greensboro distribution centre from Orlando DC, opening up the needed distribution capacity for our continued expansion in the Southeast states. Our eastern divisions store group is experiencing strong comps store growth and we feel confident with the increase market presence in the Southeast state we will continue to gain sale momentum.
We are also seeing a good sales trend developing in the northern division and with the additional market presence on the converted Checker stores and improved service and inventory levels provided out of our upgraded Minneapolis DC, we expect to see this trend continue throughout the year. Now to summarize our progress on our CSK conversion work, we are now in the final stretch of completing the first phase of the conversion that started last September.
This included the 300 plus stores that we designated could be switched over to O’Reilly distribution center. Next week we will be finishing the last group of New Mexico store and with last week’s Detroit DC and store conversions finished, all the stores in this first phase will be replenished on an nightly basis.
Most important is the increase in upgraded inventory SKU mix in the store. Comparative market pricing and the operation on the O’Reilly point of sale system.
We will still have store reset work to do in the Detroit area store that this should be finished by mid summer. As immediate follow-up to all of these store inventory change over and layoff resets, we are also in the process of interior image upgrade that include installing O’Reilly to core packages.
The exterior re-brand, including new O’Reilly signs has also started with the checker stores in the northern states and is moving to the New Mexico stores. Plans are being made to re- brand the Chicago Murray stores to O’Reilly followed by the Detroit stores later on in this year.
With regard to the change overcast for these 300 stores, I also want to recognize the hard work of O’Reilly team members who have been involved and responsible for planning and execution at the corporate and distribution level. These store installation supervisors that have manage the actual conversion in the field have done an absolutely outstanding job.
They were supported by literally 100’s of O’Reilly team members from throughout the stores, that volunteered to help in the change over and training of our new team members in the CSK conversion store. No doubt this is a great example of O’Reilly culture based on hard work and dedication.
In order to move on and review our plans for the balance of the CSK store base. It obviously starts with the required addition of distribution capacity and as Greg announced and we are happy to announce we have finished the site selection and acquisition of all four of the new distribution centers out west.
The first DC is scheduled to open in Seattle in November and will service the 246 Schuck stores in the Northwest. The Southern California DC will open next January and service 230 Kragen stores.
The Denver distribution center is scheduled to open in March and service to Colorado checker store and in May we will be opening the Salt Lake City location to supply the area the low priority Checker store. All of these will open with O’Reilly distribution systems and service model included in expanded SKU coverage and not replenishment.
Then after the DCs are open the current CSK distribution centers, both in Phoenix and Northern California will be reformatted to the O’Reilly DC model, which should be completed by the end of next week here. This is obviously a very aggressive roll out plan, but we have an outstanding DC leadership team developing and addressing all of the pieces of a very complicated and time convince plan, we are very confident in their ability to get the job done.
Now regard to the actual store conversions they were obviously be in conjunction with the opening of each new DC. Realizing at all stores will receive a point of sales system; there will be a huge amount of training and orientation of the team members during this process.
Unlike the 300 store we are now finishing, these stores will not have inventory lifted since line changes are progressing in the stores now and for the most part should be completed by the time store changes, DC computer systems. This will make the transition much easier and less disruptive for the customers and team members.
We will however need to reset plan in advance and do interior image upgrades to the O’Reilly brand followed by the rebranding the exterior to O’Reilly. In regard to the rebranding of these stores has announced our co-branding plan is well underway.
It should help make the actual rebranding to O’Reilly a much smoother transition. All team members are now wearing the green O’Reilly core branded uniform shirts, all interior signage is co-branded, all our print and radio advertising has been converted to co- branded and the storage of stocking O’Reilly branded chemicals and private label products.
The feedback on a co-branding from the team members and customer is very positive. Of course the most effective part is not what we are saying, but what we are doing in regard to improving our store inventory levels and Hub support systems while adjusting our prices to be competitive.
It is a process and obviously it takes time to establish and build market share, but the transition has started and product line by product line we are improving the stores ability to grow their business. Of course the addition of nightly service level, O’Reilly systems and the total rebranding O’Reilly will be the final and key foundation for our growth and success in these stores.
Now regard to our team member training and staffing efforts, the store operations, field sales and distribution management teams are being realigned to mere the O’Reilly program and management concepts. Our new team members have been very receptive to this transition and the O’Reilly duel market focus needed in the field to better manage our operations and service both our retail and installer customer.
Just to make a final comment on Greg’s comments on the sales growth, I want to point out that during the last couple of years we’ve been busy implementing several key programs at the store level throughout the company. Including a new point of sale system, a new labor scheduling tool and a new LMS or computer based training system.
These new tools are now fully implemented and can play an important role in improving our productivity and customer service levels in all of our stores. In addition our installer sales teams have never been more focused on making quality call and building business relationships with our professional customers.
The great example of this is our Certified Auto Repair installer marketing program which continues to gain membership and is now up to over 2300 quality repair shops. We are continuing to add over 15 new shops each month and almost a half of them is coming from new installer customers in the CSK market areas.
Overall, our stores had never been better prepared and better positioned to service us both our retail and installer customer. In ending, I would like to congratulate team O’Reilly on the outstanding sales achievement for the first quarter, no doubt it’s a result of lots of hard work and continued focus on giving the best customer service level in each store market.
I’ll now the call over to Tom.
Tom McFall
Thanks Ted, now we will take a more in depth look at the numbers. Sales increased $518 million, 80% over the prior year to $1.2 billion for the quarter.
The increase was attributable to a $55 million increase in the O’Reilly comp store sales, $37 million in non comp new store sales, $1 million increase in non-comp non store sales and $425 million in the acquired CSK stores. For the year, we maintained our total revenues guidance of $4.7 million to $4.8 million.
Gross profit was 46.6% of sales for the quarter versus 46.2% in the fourth quarter of 2008 the improvement was driven primarily by bank synergies from our increased purchase volumes, offset in part by a full quarter of price corrections in the CSK stores to move the competitive pricing and the increased amount of commercial sales at the CSK stores. We continue to be comfortable that product merchandise acquisitions cost savings will be $50 million in 2009.
For the year, we anticipate gross profit as a percentage of sales will be 46.8% to 47.3%. SG&A for the quarter was 36.9% of sales versus 39.0% in the fourth quarter of 2008.
Excluding non-recurring charges from both quarters SG&A for the quarter was 36.7% of sales versus 37.9% in the fourth quarter of 2008. The increased leverage was a result of better comparable store sales, continued savings from elimination of duplicate SG&A functions, and fuel savings offset part by higher payroll associated with conversion and training at the converted stores.
We continue to expect 2009 SG&A synergies to be $7.5 million to $12.5 million on top of the $7.5 million realized in 2008. Net interest expense for the quarter was $12 million versus $13 million in the fourth quarter, with $2.2 million of that number representing amortization and debt issuance cost.
To extend our debt is not swap to fixed rates; lower LIBOR rates during quarter had a positive impact on our interest expense. We expect 2009 interest expense to be $51 to $54 million with $9 million being non-cash amortization of debt issuance cost.
The tax provision for the quarter was 38.5% of pretax income. We expect full year tax provision to be 38.4% to 38.7% with the increase over fiscal 2008 attributable to including a full year in the CSK stores which predominantly operate in a higher tax rate states.
Excluding the non-cash acquisition related charge, adjusted EPS for the quarter was $0.47 per share, which represents an increase of 17.5% over the prior year. The only remaining acquisition charge we expect to take is the amortization of trade names and trade marks recorded as part of the purchase price allocation in accordance with the statement of financial accounting standards 141.
We’ll amortize the remaining value over the next two years as we cover all the stores to the O’Reilly brand. For the quarter the impact of this non-cash charge was a penny and as expected that for the year the impact on GAAP EPS will be a decrease of $0.03.
Moving on to the balance sheet; the core O’Reilly average per store inventory at the end of the quarter was $475,000, which is a slight decrease from the $478,000 as of last March. For the CSK stores the average per store inventory increased from $461,000 per store at the end of December to $511,000 at the end of March.
This significant increase is a result of our line convert process swinging in the high gear. The average CSK store inventory in excess of the average O’Reilly store inventory is a result of duplicate inventory in the CSK system as a result of these extensive line changeovers.
When the integration process is complete, we would expect the average CSK store inventory to be similar to the core O’Reilly levels. Accounts payable of $761 million was 46.8% of inventory, as compared to 46.7% in the prior year.
The APD inventory ratio was helped by significant line change over orders, but the ratio will continue to be under pressure based on existing credit markets. Total borrowings were $791 million at the end of March, which was an increase of $58 million over year end.
This increase was driven by $61 million increase in the borrowings under our ABL, which had $675 million outstanding at the end of March. Their increase in borrowings was expected, as we invested in additional inventory for the CSK stores and purchased three DC properties.
As of March 31, we had $395 million of availability under our ABL. We maintain our projections that we’ll incur in additional $80 million to $120 million of debt from December 31, 2008 to December 31, 2009.
Capital expenditures were $151 million for the quarter, which is inline with our expectations. The increase of $92 million over the prior year is attributable to the three DC properties purchased during the quarter and the CapEx to converted stores.
We continue to expect to spend between $420 million and $470 million on CapEx this year and have depreciation expense between $130 million and $145 million. Now for some other financial information.
Cash flow from operating activities was $87 million for the quarter compared to $119 million in the prior year. The $32 million decrease was driven by the investment in inventory at CSK offset in part by higher EBTIDA.
Stock option expense for the quarter was $3.3 million compared to $1.4 million in the prior year with the increase driven by the options issued in conjunction with the CSK acquisition. For the quarter, the reserve for LIFO decreased by $3 million as prices stabilized and some base commodity prices decreased.
To recap our guidance for the second quarter, our comparable store sales guidance for the CSK branded stores is 1% to 3%, for the O’Reilly branded stores 3% to 5% and the consolidating comp guidance is 2% to 4%. This comp guidance is given based on the progression of the quarter thus far and with consideration of the negative impact of the Easter holidays falling in the second quarter in 2009 versus the first quarter of 2008.
Our GAAP EPS guidance for the second quarter is from $0.50 to $0.54 on 136.7 million shares excluding the non-cash charge for names and marks we expect adjusted EPS to be $0.51 to $0.55. For the full year 2009, our comparable store sales guidance for O’Reilly branded stores is 3% to 5% and for CSK and consolidated the comp guidance is 2% to 4%.
Our GAAP EPS for the year is from $1.89 to $1.93 on 136.9 million shares and excluding the charge for names and marks, which is the only acquisition related charge we expect to take in 2009. We expect adjusted EPS to be $1.92 to $1.96.
At this time, I’d like to ask Chantal the operator to come back and we’ll be happy to answer your questions. Chantal.
Stephen Chick - FBR
A couple of questions, may be on the numbers if I could. First just to clarify the O’Reilly branded comp of 8.2% is just for the leap year comparison, is it as simple as kind of 1/91 type of calculation.
What would that have been without the day and if you can give me the same calculation for the CSK branded comp of 1.5, please.
Gregory Henslee
Stephen, in general the numbers work like this. The extra day last year was a Sunday.
So, for the core O’Reilly stores in the quarter it was not a full day’s impact since the wholesale side of the business doesn’t run on Sunday, for CSK it was a bigger impact because Sunday is a big retail day for them.
Stephen Chick – FBR
Okay. So and what was impact again?
Gregory Henslee
So, in general it’s a little less than 190 for the O’Reilly stores and a little more than 190 for the CSK stores.
Stephen Chick – FBR
That’s helpful, and your comps are kind of about where you are trending so far in April of the current quarter. I actually didn’t get that, because your guidance obviously in somewhere in the last quarter is pretty conservative relative to the quarter that you just reported.
Have April trends continue the trajectory or what are you seeing so far in that the quarter that we are in?
Gregory Henslee
Steve what we would say is that the trend we were on and the first quarter is basically continued into the second quarter with the caviar beginning of the Easter last year it was in March and this year in April and that obviously has a negative effect to this plan in April. So, that obviously from a comparison standpoint has made the weak so far this quarter not much as good as why would have that not happened but done and I know that it could be viewed that 3% to 5% O’Reilly with 8.2% comp sounds slightly uneven comparison can see in conservative.
But we continue to have the overhang of just the general economy and the unemployment being what it is and the potential for that increase, which you ultimately could have an effect on our customers even though they are trying hard to mange their expenses and that’s I can and maintain the cars and so forth. Hopefully, we do better than what we are projecting, but we feel very confident in projecting 3 to 5 for the core O’Reilly and 1 to 3 with the CSK stores that it not yet been converted.
Stephen Chick – FBR
I think also, correct me if I’m wrong, but is the kind of later months of the quarter, are they a higher proportion of the quarter for sales. Is June the highest --?
Gregory Henslee
Yes, the second quarter we ramped total volume from March to June, with June being the largest month.
Operator
Your next question comes from Kate Mcshane - Citi Investment Research
Kate Mcshane - Citi Investment Research
Can you just briefly talk about your view on some of the incentive programs that are being offered by the OEMs. Do you think that could slow some of the strength that you have been seeing in your business, and is that incorporated into your guidance or will this possible improvement completely be offset by dealership still going --?
Gregory Henslee
Yes, our business is always been driven by vehicles that exist in the market place that are older vehicles and vehicles that are out of warranty and so forth. There is no question that car sales have always been something that, as new car scheme on the road they obviously didn’t take us any parts of the older cars.
There is such a big vehicle population in the United States and there is so many people that I think they’re finding out that there is value in the cars that have a 100 to 150,000 miles on them and so forth. I don’t see a lot of the core customers that we deal with taking advantage of the incentives, because they just cash position they are in, as families with unemployment where it’s at and so forth.
If something what happened to where new car sales where just to go crazy, and there is a material change in the vehicle population in the U.S., yes I can have some short term effect possibly, but that’s not happened in our history to that agree that affected our business materially.
Kate Mcshane - Citi Investment Research
Then can you just talk about the competitive environment now that you’ve converted more towards and converted more to the DCs. Have you seen your competition, weather it would be national competitors or regional competitors get more aggressive in these CSK regions?
Gregory Henslee
Well, we boys had we believe is had great respect for all of our competitors. They’ve always been relatively aggressive and there is all our market that we exist and that we don’t have a good strong competitor.
We’ve not seen a material change in the level of competition as the result of any of the efforts we’ve made to convert the stores, because I too like those stores have solid competition to begin with. I do think that the things that we are doing put us in a much better position to compete with companies that are very capable of competing with us.
We’ve done that to our business lives and we’ll continue to do that and we’ve think that we have good strategies to go-to-market and we did a good job managing inventory and managing our pricing and we have great teams in the field that they drive our commercial business and provide great service to our retail customers and we’re going to do all we can to drive retail traffic into our stores, but I guess to answer your question directly, now we’ve not seen a material change in competitive activity as a result of the things that we have done.
Operator
Your next question comes from Scott Stember - Sidoti.
Scott Stember - Sidoti & Company
Guys, to once aging talk about how many DCs you will eventually be putting in place our on the West Cost, just gives us a timeline on more time?
Gregory Henslee
The plan is that we would open the Seattle distribution center at the end of this year, and that we will open a southern California distribution center the first of next year. Denver, late spring next year and then Salt Lake City shortly after Denver, maybe early spring, early summer and then the Dixon, California DC that it exist after now that is supplying many of the CSK stores out west.
It would be converted in the late summer and then Phoenix, which is the other DCs that supplies the western CSK stores would be converted in early fall.
Scott Stember – Sidoti & Company
And beyond that plans to had any additional DCs up on the west coast?
Gregory Henslee
Not right now. That gives us good solid capacity and some growth potential for sometime to come.
We still have a lot of work to do to evaluate our potential to expand out west, although we do see potential and we got capacity built in to our existing distribution plan to offer that, but we don’t have any plans to put any other distribution centers out there right now.
Scott Stember – Sidoti & Company
Okay and on the west cost stores as far as the layering in some of the commercial buss, can you talk about how that is going. I know that you’ve talked about the initial 300 stores that some of them which heard you’ve done very well.
Have you seen anything on the west cost?
Gregory Henslee
Well, that is our growth in the CSK stores out west has been driven little more by the commercial business that the retail business thus far. I would expect that the disparity in the rate growth that continue for sometime, I think our promotional programs are solid and as we put ourselves in a position to have more access to more cars and good category management so forth as I’ve said in my prepared comments, I think that we’ll continue to grow our commercial business.
Yes, we’ve done pretty well in the commercial business out there so far, and we have a long way to go and we are far from being the supplier that we’ll end up being after once we have all of our tools in place, but we have taken advantage of the deployments of inventory that we made in 120 stores that we put, broader inventory and those inventories are strategically located to service kind of a hub type system for stores surrounding them. So we have had some good fortune I guess in expanding our commercial programs out there.
So just we’ve don’t put this in our public disclosures, but this has been asked before. Just as a percent of sales, our CSK had previously measured their commercial business as being about 18% of their sales and DIY 82%.
Based on our measurement during the fourth quarter, it was more like 10 to 90 and currently it’s about 13 to 87.
Operator
The next question comes from Craig Kennison - Robert W. Baird.
Craig Kennison - Robert W. Baird
Did you anticipate any supply disruptions related to the big three troubles in the automotive sector and what are your contingency plans?
Gregory Henslee
Well, we certainly have watched that because there is no question that many of after market suppliers are also OE suppliers. Many of those suppliers are very strong suppliers that have a good mix of both after market and OE business, but yes we have evaluated that our merchandize team has evaluated that by supplier basis.
Many of our products come from more than one supplier as it exists today, and in most cases we have backup for buyers for the suppliers that we have for core products, if it ever came to that we would be able to use back up suppliers. We currently do that, we’ve done that for years.
If a supplier replaces their computer system which has happened over the past 8 or 10 years as companies has moved to more enterprise type systems, they sometimes would have glitches in shipping and so forth and we would augment one supplier’s capacity with another supplier to help ensure that we are able to provide parts for our customers. That same strategy, we’ve used in the past would apply now with a list of back up suppliers reach at the primary categories that we carry.
Craig Kennison - Robert W. Baird
You still need to stock up on additional inventory ahead of any of that issue?
Gregory Henslee
No, some of that products that we carry, we order more than once a week. If we felt like a supplier was headed towards some eminent problem, we would certainly do that.
We’ve not been put in position to do that any more than we would with the seasonal anticipation of demand and so forth, it’s the amount of what we’ve done in the past.
Craig Kennison - Robert W. Baird
Then finally, do you have any early projection on how you and your DIFM customers would benefit from franchise dealer consolidation?
Gregory Henslee
Well, in the repair work that the franchise dealers are doing now in some of these new smaller markets, and there have been several closings as most of you know. There is a convenience factor related to repair work that’s out-of-warranty and some of the carry over that a warranty vehicle and is head to a dealership is cash out-of-warranty business, we believe will be distributed out into the after market simply from a convenient staffing Some one who lives in a small town, you know you maybe 30 or 40 miles from a metro area that was may be having their car work done in a dealership when it needed maintenance.
I think that those customers, at least many of them will transition to an after market supplier and the net business would be supplied by us and the others that compete in the after market.
Operator
(Operator Instructions)Your next question comes from Anthony Cristello - BB&T Capital Market.
Anthony Cristello - BB&T Capital Market
One question I had was, Greg when you talked about the lift in the converted stores of the comp being sort of the 4% to 5% range and if you go back to last quarter and you talked about those converted stores at the time, and may be that was the trend for that week or that period running in sort of mid-teens. Can you sort of compare or contrast what is it a timing difference, is it a situation where if you would have looked at the period as a whole at last quarters data point that total comp might have been two and now we’re at five?
I’m just trying to understand in relationship what might be the difference and how I should be viewing that?
Gregory Henslee
Okay. Well it is a point we reported, these stores we didn’t have remainder been converted for very long and as you know we are brining these stores up from a negative comparable stores sales performance.
As I said many double digit negative comparable stores sales performance. So takes a while to get them to the point that they’re positive.
At the point that we reported our fourth quarter earnings, we decided that rather than try to include the period in which the negative sales are pulling back to zero we would just look at our weekly performance for the difference at the stores. I think what I reported on was the stores that have been opened in October and then November and so forth and then talked about how they had performed there 13 week of operation or 14 week and 15 week.
At that point those stores were on a strong trend, most of those stores were in the upper Midwest, sometimes in the near time you can have periods of real high demand during your ideal weather conditions and periods of low demand during worse weather conditions. Since then and I think your comment would probably pretty close to 1% or 2% range, something like that.
We would have looked at all those stores at that time including those that just opened that we’re still running negative that might have been pretty close. We now have a larger conversion base and as I said what they generated for the 51 stores, if you compare 90 days and these would be the stores that have been compared at the end of the year, they generate 4.3% and then the 27 stores had been opened four weeks at the end of the year can generate 5.8%.
That’s currently the run rate that we are on. Specially upper Midwest, I think as we get into spring, those stores will continue to ramp and then I brought up some points that we have to consider relative to the price deflation that we’ve done ourselves and knew that that would help some of that and in some new other things that I’m just have an affect on a short period of time you have a comparable stores sales.
Thomas McFall
When we look at the stores, on a month that they converted and we look at them in buckets like that. Yes, we’ve talked about the set out negative as we have training issues and sequentially, each month’s class of store conversions has done better month-after-month, so we keep adding stores to the converted buckets, but we haven’t seen what the ultimate comp years for the converted stores, because they continue to do better month-after-month, but we are not to the run rate yet.
Anthony Cristello - BB&T Capital Market
Just as a follow-up, are the trends in the stores you have yet to convert as bad on a year-over-year basis as what you’ve converted today? I mean, where they running as negative, so the Midwest, a worse group or as the California Stores a worse group from a year-over-year comparison in terms of conversion, is that--?
Gregory Henslee
Well, the types of conversion that we are completing right now, we are almost done with full store conversion. So from this point forward, excluding the stores that are supplied out of the Detroit they’ll just be, we’ll change the upfront, the display merchandize and the layout that there will be one product line at a time, basically but yes, some of the upper Midwest stores warrant their best performing stores, no doubt about it.
The California store certainly perform better, some of their Southwest stores are currently not performing as well as we would like because of some of the order disruption and the grace things that are going on with the people on the mix on the revaluation of the pay and things like that. Generally I would say that the stores in the upper Midwest warrant their best performers and we converted this Chicago stores and we have yet to have enough time to really get a measurement of how those will do, but those were O’Reilly stores and we feel good about the amount of business that we will be able to capture over time in Chicago as we implement our commercial programs.
Operator
Your next question comes from Brian Sponheimer - Gabelli & Company.
Brian Sponheimer – Gabelli & Company
I hope that we could go down a little bit more on these 8.2% comps for your O’Reilly branded stores. I apologize if I missed it, but could you quantify how much that Easter timing impact had in your comps and secondly, if I may, I’m curious if you have any idea how much of that comp was actual with deferral maintenance that took place during the third and fourth quarters?
Gregory Henslee
Yes, the Easter being in the second quarter this year, it was definitely a contributor to the comp and it’s attraction of course and mitigating factor is that we were comparing 91 days last year to 90 days this year. We don’t really have quantification for what the effect of that would be.
I’m mean just the number was so outstanding, I was trying to figure out what took place in the way of consumer spend or consumer behavior that went in your number.
Ted Wise
I think what it is, it just started late last year, and we have consistently saw stronger comparable store sales. I think consumers have really having been through a period of couple of years of high gas prices differing every thing that they can, having been in this mode that many of them would trade cars every three to five years let say, realized that, one, lot of the domestic manufactures are not offering lease vehicles anymore so they maybe haven’t buy or keep a vehicle and then two that they maybe keeping whatever they are driving for a longer period of time, and they want to maintain a better to keep it on the road.
I think that what a lot of consumers are realizing is that these cars have higher mileages are really high quality cars when they rebuilt, from a drive train and a body in an interior perspective and that they can be driven a higher mileages. So, what we’ve seen is very steady and relatively robust business since the end of last year, we not really had any dips in demand for any extended period of time, since the end of the last year.
Its impossible for us to measure how much of this is catch up on differed is opposed to just business as usual, but I would say that the comments that we get from our commercial customers are that they appears to not to be as many customers that are differing major repairs that need to be done to fix the car rate and make road worthy.
Operator
Your next question comes from Jack Murphy - William Blair.
Jack Murphy - William Blair
I just want a follow-up on an earlier question and ask a slightly different way. On those 15 or I guess 24 stores that were converted first.
Could you talk about how those are now performing and weekly comp terms?
Gregory Henslee
Well I don’t have that.
Ted Wise
The comps are, as I’ve mentioned on our earlier question that comp continue to improve, so they are above where the averages is having started the year and have gain traction throughout the quarter, we don’t comment typically on weakly comps because they can be up and down, but this stores continue to perform better or so, you can think about the numbers we gave as the average for the quarters, so we’ve progress from there.
Jack Murphy - William Blair
So, let me just to be clear in terms of the sort of 15% to 17% range that you talked about last time, its exceeding that in the most resent weeks?
Gregory Henslee
We look at it obviously in different layers of stores, we didn’t come prepared to disclose the weekly comps of different segments of stores as they have been converted and the only reason we did that last quarter is because we had such a short period of time. Between the times the stores have been converted and the time we reported we decided that was probably the most inductive way to indicate the trend at those stores were on, and we just don’t have those numbers with us right now and aren’t prepared to disclose those.
Jack Murphy - William Blair
Just another may be less specifically of asking it, what is your expectation is for sort of first year comps after conversion, how you’re thinking about that?
Gregory Henslee
Well, that’s yet to be seen to large degree, our experience so far has been once we get past, pull the stores out of that negative comp range and get them comp positives, that they’ll t comp well. I would say that we would expect mid-single digits comps for sure and beyond that, but then again we are trying to be relatively conservative on what we set for expectations in these stores, because a lot of it is yet to be seen.
We know that these stores have straight greatly from being core auto part supply stores and we are putting them back in that business, many of the categories that we have put them into, hard parts category that is really the basis of our business. Those categories in the conversion stores are comping double-digits today.
We’ve sacrificed some of the business that they were previously doing and more ancillary items by intent, and we think the stores will do very well as we do these conversions, bit I think a reasonable maybe somewhat conservative approach to conversion stores would be that we would expect them to comp be in the healthy mid-single digits in the first year, or hopefully beyond that, but again I don’t want to get too far ahead of ourselves and what the expectations are without having some more experience under our belt.
Thomas McFall
Because of stores we’re at North, we are just not getting all the signs changed that on the exterior and the interior remodels are being finalized in the advertising starting to kick in on the O’Reilly Claire program and radio print. So we’re certainly optimistic that spring at in the northern states.
So, we are optimistic that they are going do well.
Operator
Your next question comes from Matt Fassler - Goldman Sachs.
Matt Fassler - Goldman Sachs
I guess there is a couple of quick follow-up questions, as you think about the competitive environment, is your sense that jobbers that you compete against or someone is in direct constraint at this point in time might that be contributing to your comps or would you just say that the market in general is doing quite well right now.
Gregory Henslee
I think that if there is any pressure in the industry for a retailer perspective, the independent jobbers are the ones that are feeling close to that pressure. I think is some of the retailers come into the commercial side of the business that there is some looking prudent out there that the independent jobbers may have had in some of that business.
I think that there is some price pressure put on those guys because of the three step distribution model that they have, they obviously can’t discount as much as some of other companies and that they feel more pressure than others, so I think I would agree with your comment and that the any kind of job or is that probably feeling more pressure than anyone else right now.
Matt Fassler - Goldman Sachs
Then just a second question, I think you said on this already, but just try to get some clarity form my perspective I guess you discussed that the terms of the progress that you are making in CSK which seems to be terrific in general, sort of in two different frameworks, one was and we get access at the time of subsequent to conversion sometime in the first quarter call and then somewhat differently in this call. Is it safe to say essentially that you continued to make progress in other words that the stores that you converted in the first quarter are tracking better than the stores you converted over the course of the first quarter, or sort of forget about the double digit numbers that we saw, that we heard in the last call, think about the numbers that you gave us today as building blocks?
Gregory Henslee
Both theses on a quarterly basis, but “yes”, your comment relative to the earliest conversion stores ramping better in higher comps in the stores that are most recently compared to that absolutely right and that’s exactly what we are seeing in all the stores that we convert.
Operator
Your final question comes from Alan Rifkin - Banc of America
Alan Rifkin - Banc of America
For the non-converted CSK stores, where you simply change the product lines and Greg I think you said 20% of the product lines have been changed, how are comps for those products lines trending?
Gregory Henslee
Well the hard parts category that we’ve converted they have trended that very well, and again its all over the Broad, as you know we have taken those stores as we did the converted stores we are incrementally taking them out of some of the products that CSK had focused on over the last few years of their existence and primarily being non-core automotive, import type item such as motor bikes and various pneumatic nailers and stuff like that, it really aren’t auto parts type of items. So really what we are doing is, we are trading those sales to get hard part sale and we feel like a more sustainable and that we can build on, so yes some of the hard parts categories that we’ve changed over headcount very well for the quarter and we’ve expect that business to continue to build which is our strategy and plan.
Alan Rifkin - Banc of America
What is the methodology behind, which specific product lines are changed over given that it’s one at a time? What’s the basis for deciding what the next product line to be changed or will be?
Gregory Henslee
We it is couple of things, and one is just the preparedness of the supplier to be ready to change those products over your, of course have to have the product to perform the change over. Ideally and really our focus is to try and get the stores in the best consumer position they can be and to compete with, reach our competitors and the wholesale competitors.
So getting our private label price type brands, so we have a good, better, best offering and can compete with our retail competitors out there on entry level price was important. That took a little longer that we would have liked actually, but when we got that that completed for most part now.
The reason it took some time is that those suppliers just want to position that they could immediately fill the orders for that many stores, but we now have that completed and now we’re laying the groundwork with some of our branded offerings to put us in a better position to compete on the commercial side having recently changed our chassis and steering category of our product line and our break of product line.
Operator
There are no further questions at this time. I would like to turn the call back over to Greg.
Greg, please go ahead.
Gregory Henslee
Well, thanks everyone for your time this mornings and we are excited about the business, excited about the way the conversions are going about the acquisition in general and we look forward to reporting our second quarter performance later on the summer. Thanks everyone.
Operator
Thank you everyone. This does conclude today’s conference call.
You may now disconnect.