Jul 30, 2009
Executives
David O’Reilly - Executive Chairman Tom McFall - Chief Financial Officer Greg Henslee - Chief Executive Officer Ted Wise - Chief Operating Officer
Analysts
Scot Ciccarelli - RBC Capital Markets Christopher Horvers - JP Morgan Steve Chick - FBR Capital Markets Craig Kennison - Robert W. Baird Brian Nagel - Oppenheimer Michael Baker - Deutsche Bank Winston Sneasy [ph] - Bank of America Tony Cristello - BB&T Capital Markets Gregory Melich - Morgan Stanley
Operator
Good morning. My name is Mia and I will be your conference operator today.
At this time I would like to welcome everyone to the 2009 second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise.
After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) I will now turn the conference over to Mr.
Tom McFall, Chief Financial Officer. Sir, you may begin your conference.
Tom McFall
Thank you, Mia. Good morning, everyone and welcome to the O’Reilly conference call.
Before I introduce Greg Henslee, our CEO, I would like to read a brief statement. The company claims the protections of is 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 the press release that are not historical facts are forward-looking statements.
Such as statements discussing among other things expected growth, store development, integration and expansion strategy, business strategy, future revenues and future performance. These forward-looking statements are based estimates, projections, beliefs and assumptions that are not guarantees for 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.
Greg Henslee
Good morning everyone, and welcome to our second 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. It’s now been a little over a year since we closed on the acquisition of CSK auto and embarked on the task of integrating CSKs operations into O’Reilly.
This has been a very significant task, and we’ve still got a long way to go to be fully integrated and able to execute our go market strategy in the western half of the country. At the same time, however, we’ve come a long way in a relatively short time.
We’ve integrated many of the headquarters functions, converted or merged the stores in the middle of the country, where we have distribution reach from an O’Reilly distribution center, converted the Detroit distribution center to O’Reilly systems and material handling equipment, implemented delivery service to commercial customers in most stores, improved inventory availability, adjusted our pricing to be market-competitive, and many other projects that will lay the ground work for the incremental improvements in the CSK store performance overtime. On top of all this, the core O’Reilly stores continue to perform very well, generating a solid comparable stores sales gains in both the commercial and do it yourself sides of the business.
Clearly, the first year following the inquisition has been a challenging yet outstanding year for team O’Reilly, and it’s one that will be reflected on in the future as one of the greatest years in our country’s rich history. I want to thank all of team O’Reilly for your commitment to our continued success and for the great job you’re doing in taking care of our customers and ensuring that they continue to make our stores your first choice in fulfilling their automotive needs or supplying their auto repair business.
Business during the second quarter generally remains steady throughout the period, continuing the trend we experienced earlier in the year and that steady trend has continued to this point in the third quarter. We’re very pleased with the core O’Reilly sales performance and feel the 7.8% comparable store sales growth that we achieved clearly exhibits the ability and commitment of the core O’Reilly team, as we simultaneously work to integrate the CSK operations.
As shown in our press release last night, we continue to work to clearly express the components of our comparable store sales. There are a lot of moving parts with the integration of CSK, and we believe dividing our comparable store sales up as we did in the press release is the clearest way to represent each of the different components of the 4.8% consolidated comparable store sales growth we achieved in the second quarter.
I’ll take just a moment to expand on each of those components and I’ll start off with the stores that are operating on the O’Reilly point of sales systems. These stores include the core O’Reilly stores, the fully converted Checker stores, which are located in West Texas, New Mexico, Montana and the upper Midwest, and both converted, partially converted as well as non-converted Murray stores, which are running on the O’Reilly point of sale system.
79 placed on the O’Reilly point of sale system in order to facilitate the conversion of the Detroit distribution center to the O’Reilly operating system, but we did not fully convert the merchandise at these stores, and are doing the back room conversions one line at a time at the same pace as the CSK stores in the western half of the country. During the second quarter, 26 of these stores have had their display area reset while the store teams did their best to keep the stores open for business.
The merchandise mix in the display area of these stores was refreshed, but the back room inventories will not be fully converted at one time, as we’ve done in the Chicago Murray stores and the Checker conversion stores. Again, their back room inventories will be changed and updated at the same pace as those in the CSK store in the western half of the country.
The display areas in the remainder of the Murray stores will be reset in the third quarter. These stores, in total, which represent 2,351 of the 3,387 stores we had open at the end of the quarter, generated 6.1% comparable store sales growth in the second quarter.
As I mentioned, the core O’Reilly stores, which represent 2,087 stores generated 7.8% comparable store sales for the second quarter. Business in our key locations has remained relatively steady throughout the quarter, continuing a strong trend that has been present for the past several months.
We have an outstanding EL management team running our key locations and we’re pleased to continue the strong performance in these stores. Our business has been performing nicely in both the commercial and [Technical Difficulty] with the commercial business outpacing the DIY business by a small amount.
The second component of the 6.1% comp generated on O’Reilly systems is the Checker stores that we’ve been working to convert over the past several months. This group represents 123 stores.
These stores, some of which were converted during the second quarter, generated a comparable stores sales decrease of 3.4%. Many of these stores have performed extremely well after the conversion, as we’ve discussed and the longer they’ve been converted, the better they perform.
However, several of these stores, on an accrual performance trend coming into the conversion, and it takes time to turn that trend. At the end of the first quarter, we reported on 51 of these conversion stores that were completed through the end of 2008, and I’m pleased to report that these 51 stores continue to comp positive, as do many of the conversion stores.
Please keep in mind the CSK stores are not price competitive, and we have headwinds from a comparison standpoint, to the lower market competitive prices that we’ve implemented. CSK was also very promotionally driven, and we’ve reduced the promotional activity to what we consider to be appropriate to building traffic in the stores in order to give ourselves the opportunity to create repeat business, not drive sales dependent upon promotional activity.
Additionally, it probably goes without saying that the conversion in general is somewhat disruptive to business, and there’s a pretty significant training following the conversion. We look at the performance of these stores very closely on a by category basis and we’re very pleased with the performance we’re seeing in the key hard parts categories, yet this performance is muted by the transition away from the non-automotive categories that CSK focused on along with other factors I mentioned.
We feel confident that our model is more sustainable based on netting demand from both commercial and do it yourself customers, through application hard parts, and are confident in our ability to perform with this model as we demonstrated in the O’Reilly stores. Our experience has been that converted stores incrementally gain momentum following the conversion and many of the stores included in this group don’t have much time due to about most conversion, and we’re confident in our ability to generate positive results in the conversions as we continue through this transition into the pure auto parts business.
Through this point in the third quarter, these stores, as a group popping positive, and we expect incremental improvement in these stores as they continue to gain traction. The third and last implement of the 6.1% of the O’Reilly system generated comp is 141 Murray stores.
62 of these stores were fully converted during the second quarter. 26 had the layout reset and the display merchandise computed, and the remainder had not had any conversion work at the end of the period, other than backroom product line changes as well as the POS system change.
The reason we decided to report the Murray’s comp separately is that Murray’s really is a much different operation. For years, Murray’s operated as some of the very best retail automotive stores in the country, with very large display areas, relatively small hard parts inventories, with very high retail service levels.
These stores were built to serve the light do it yourselfers. We looked at them several years ago before CSK bought them as a potential acquisition target it realized just how finely tuned the retail presence was.
Their performance has incrementally waned under the management of CSK, and the trends we’ve seen since we’ve owned them have certainly left room for improvement. Some of this is related to the general economic conditions in Detroit and the surrounding areas, and some of it is simply the continuation of a trend that has been present at some of the Murray’s stores for sometime, coupled with the same factors that I mentioned that is creating some headwind at the Checker conversion.
The Murray’s stores as a unit generated a comparable store sales decrease of 11.9%. As is the case with the Checker store conversions, we’re taking the converted Murray’s stores through a very significant transition.
On a bike category basis, corporate is doing very well in many of the key hard part categories, but on balance, not offsetting the sale of promotional products, non-automotive merchandise that was present at CSK. We see a lot of potential for these stores in the pure auto parts business, as we all put them in the business.
Both retail and commercial, and we’re confident in our ability to generate positive results as we complete conversion in these stores and start executing our dual market strategy, supported by much improved inventory coverage and competitive pricing. As I mentioned earlier, our consolidated comparable store sales growth for the second quarter was 4.8% this year.
This improvement was driven by three primary factors. First, the higher mix of retail sales in the CSK locations; second, the improved cost of goods as a result of our negotiations with vendors as a much larger company; and third, better margins on commodities, like oil and antifreeze, due to cost bids reductions related to raw material cost decreases.
To this point, we’ve been able to maintain our selling price just taking the several of these products to higher than usual gross margins. We’re very pleased with the support our vendors have shown for this acquisition.
It’s clear that many of them see as much opportunity as we do to grow our business in these stores using a dual market strategy, and we’re working to deploy better inventory covers across all CSK markets with the product line changeovers and updates we have, as well as the expansion of our distribution capability in the west. We work hard to maintain in grew our gross margin, so we want to be cautious with regard to future expectations of our gross margin performance.
The contribution grew much better than expected commodity gross margin will be hard to maintain and since prices can be relatively volatile, and those product lines are currently contributing at significantly higher than historical levels. We’ll certainly work to maintain the higher levels that we’d expect our gross margin for the full year to be in the 47.4% to 48.8% range.
Our SG&A for the quarter came in at 36.3% of sales, compared to 32.5% last year A 380 point basis point increase, due partly to the payroll cost related to the integration effort, primarily due to the higher occupancy and payroll we’ve experienced in the CSK stores. As outlined when we acquired CSK, our intent is to improve productivity and leverage fixed costs in the CSK stores by executing our dual market strategy, and we’re making good progress in and expect continued improvements in our productivity and cost leverage as we work to continue the integration.
We’re very pleased with the 12% operating income we were able to generate in the second quarter. We’re still very early in the CSK integration process and are very pleased with the performance of the core O’Reilly stores as we work to improve the profitability of the CSK operations and position ourselves to execute our proven business model in these new markets.
Now, we’ll be covering more details of our quarterly financial performance as well as our guidance for the third quarter and the remainder of the year in a moment. In summary, it’s clear that the lower fuel prices, the decrease in new car sales and the increases we’ve seen in miles driven in the most recently reported months is creating a tailwind for our industry.
Team O’Reilly is working hard to make sure we take full advantage of this opportunity as we focused on optimizing our merchandise mix, take advantage of extensive distribution capabilities, and, most importantly, provide unprecedented levels of service to move our royal customers and our first-time customers. Again, I want to thank all of our team O’Reilly members, who did a great job here and for all the hard work that is being put into the integration of CSK.
O’Reilly Auto Parts will soon be a brand that is recognized across the United States, and our continued success is attributable to the great job each of you are duly taking care of our each customers, one customer at a time. I’ll now turn the call to Ted Wise for some additional comments.
Ted Wise
Thanks, Greg, and good morning, everyone. Well, in the second quarter, we increased our story count to 3,287 locations with net gains at 15 new stores in the last quarter, and 108 new locations so far this year.
This number is actually nesting out to 102 stores when you subtract the store closures in the first quarter due to the consolidation with the checkered stores. Our company’s expansion over the year remains 150, which at this point, we’re well ahead of schedule.
In addition 15 new store installations, we relocated three new stores to new locations and completed 11 store renovations and O’Reilly. This is a tremendous accomplishment by our field installation group, considering the task of the ongoing CSK store conversion steering at the same time.
To give a brief overview of our expansion activity by state, North Carolina their growth in 11 new stores last year. This gives us 21 new North Carolina stores so far this year, which was the growth plan to support our new 325,000 square foot of Greensboro, North Carolina distribution center that had a very successful opening in May.
North Carolina and the surrounding states will continue to be a key part of the future expansion. Ohio was next in new store quarter and 15 year-to-date.
Texas followed with five new locations and a total of 14 new stores so far this year, which gives us 519 stores in Texas. Served by our Houston, Dallas and our new Lubbock distribution centers, we continue to find great expansion opportunities in the state.
South Carolina added two new stores, for a total of eight stores this year. The additional 20 new stores net out in 12 different states.
We’ve had store growth in 22 states so far this year, which has made possible by the distribution coverage of our current guidance in DC. By the end of next year and with the addition of four new distribution centers in Washington, California, Colorado and Utah, we will provide nightly service in all of our markets.
With this level of distribution coverage and capacity on the store expansion growth throughout our 38 stores becomes more manageable with the real estate and operational level, resulting in better new store productivity. Now, in regard to the CSK problems, we continue to evaluate the locations and leases from the CSK stores.
Based on the timing of these leases, we are establishing plans to stay in the present location or search for a new and better location. Our objective is also to renegotiate the leases that are mature and may not be in line with the based lease market.
During this process, we’ve identified a group of 18 stores that will be scheduled to close by the end of this year. These are extremely low volume; non-performing stores that fall into the category of overlapping other CSK locations, higher demographics not suitable for do it yourselfer business growth and limited or no installer business in the immediate area.
These 18 stores are spread throughout the market and all are in multi skewing markets which gives us the opportunity to transfer the customers to another CSK and Riley store. From a team member standpoint with a number of surrounding stores, the staff can easily be transferred to another location.
To now briefly discuss the current stores infusions; as Greg mentioned, 79 new stores in the Detroit market, with the last to arrive in computer systems. We now have over 300 CSK Murray stores operating in O’Reilly systems in service and O’Reilly distribution center on an anomaly basis.
26 Murray stores have planograms r sent to the O’Reilly mutinied plant by the end of the second quarter, with an additional 32 having been completed since these. During the next three weeks, the last New England Murray stores have their planograms reset, with interior decorating and remodels to follow in the out front leasing.
After co-branding and advertising in all markets during this past year, the exterior signage in these 300 plus stores is now in the process of being changed out to the O’Reilly brand. We hope to have this group of stores re-branded by the end of this year.
We are seeing positive sales trends in our converted stores. As a team, Murray becomes more comfortable with our systems and product lines.
This group of stores experienced inventory less, systems conversions, interior remodel, all of which obviously created temporary disruption in business. The additional hard parts inventory, HUD system, nightly distribution and market competitive pricing now is in place and we’re beginning to improve our hard parts sales mix for both the retail and the installer customer.
These changes in the stores have been supported by co-branding advertising designed to educate the customer on the everyday low pricing and expanding levels available at O’Reilly’s store. Our training continues at the store level with all team members and especially with district management, store management and installer service specialists to ensure that we provide O’Reilly service levels to all of our customers.
We are confident that the current trends will continue to grow business to O’Reilly over comps. Now, in regard to our work in the thousand-plus CSK stores out west, we have made good progress in changing product lines and increasing hard parts coverage to all stores.
This process has been accomplished in one product line at a time, using CSK distribution system and a store computer system. We have also evaluated each market and established a hub and support system to provide multiple same-day delivery service to almost all stores.
The additional inventory is helping us to promote the hard parts business to both retail and wholesale customers. Pricing has also been adjusted to be competitive in the markets and our co-branding advertising is continuing to educate the customer as to the increased parts coverage with the new everyday lower competitive process, as we convert away from rebate and promotional pricing from CSK in light on to help build traffic.
The store conversion systems to the O’Reilly computer and replenishment will follow a schedule tied to the opening of the four new distribution centers and these conversions will follow a schedule of approximately 30 computer installations per week. We will start with the Seattle DC opening and the 109 full system conversions in November.
The Southern California DC will open and the 240 store conversions, will start in January. The Denver DC opens and 92 store conversions starting in March and last, the Salt Lake City DC opens in the following; wants to start in May.
That will leave us with the two existing CSK distribution centers located in California. Following a very comprehensive evaluation in basic capacity in the current, Northern California DC located in Dickson.
We have decided to relocate it to a new 520,000 square foot facility in Southern California that will give us the ability to efficiently service up to 350 stores in this area. The exact date has not been determined, but we expect it will take place in August of 2010, by which time the Northern California group of 278 stores will be changed to remodeled systems, and then last CSK Phoenix DC will be converted along with the 151 stores in the Phoenix area, immediately following the Northern California conversion.
Needless to say this is an extremely aggressive schedule and both the store and distribution management teams have and are doing tremendous job in planning and executing these transitions to the O’Reilly service model. The addition of nightly servicing, weak inventory availability helps us to take the business to the next level as well as compete an aggressive store expansion program in the US.
This September, we’ll start the out-front recess in the western stores following the O’Reilly core installations. We will continue to co-brand our advertising, during this time and make the necessary plans to re-brand the stores to O’Reilly following the computer system conversions.
This schedule and changeover process will allow the West Coast to be well prepared and ready ahead of the time of the actual computer installations. We will have most of the product lines keep moving, store inventory levels updated, prices adjusted to be competitive and stores profitably staffed to move retail and installer business.
The current comp trend in the West Coast is a sign of effectiveness of the changes we are and will continue to make in these stores. We continue to evaluate, train and expand store sales distribution teams to ensure that we have the best leadership in the field to execute the O’Reilly business model as these stores become fully converted.
To finish, I would like to thank the 44,000 O’Reilly team members for their contribution to achieving outstanding sales profit in the second quarter. In addition to the massive amount of work and involvement from all areas of the company in executing the CSK store and DC transitions coming up.
We have kept a strong focus on customer service and growing our sales in both the retail and installer business, which has resulted in a strong 7.8% comp sales increase in our core O’Reilly stores. Now I’d like to turn the call over to Tom McFall.
Tom McFall
Thanks Ted. Now I’ll take a more in depth look at the numbers.
Sales increased $547 million, a 78% increase over the prior year, and $1.25 billion for the quarter. The increase was attributable to a $54 million increase in O’Reilly comp store sales, $39 million in our new store sales, flat non-comp non-store sales and $454 million from the acquired CSK stores.
For the year, we are raising our total revenue guidance to $4.8 billion to $4.9 billion. Gross profit was 48.2% of sales for the quarter versus 46.6% in the first quarter of 2009.
The improvement was driven by an increase bank synergies and an advantageous pricing environment as it relates to products comprised primarily of these commodities, although we do not expect this environment to continue. We’ve been very successful in completing the acquisition related negotiations with our vendors, and we are raising our estimate of the merchandise acquisition cost savings in 2009 to $60 million to $65 million from our previous guidance of $50 million.
We are also raising our annual total estimate of the merchandise acquisition cost savings, starting in 2010, from $75 million to approximately $90 million. For the year, we’re raising our gross profit guidance to 47.4% to 47.8% of sales.
SG&A for the quarter was 36.3% of sales versus 32.5% in the prior year. The 3.8% increase was due to the higher cost structure required to new stores.
Taking a look at SG&A, we continue to benefit from more than expected fuel cost and we continue to incur additional store labor costs at the CSK stores to accomplish the expensive product line resets that are under way. We continue to work hard to eliminate and 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 $11 million, with $2.1 million of that representing amortization of debt issuance costs. To the extent our debt is not swapped at fixed rates, continued historically low LIBOR rates during the quarter had a positive impact on our interest expense.
We expect 2009 interest expense to be $47 million to $50 million with $9 million being non-cash amortization and debt issuance costs. The tax provision for the quarter was 38.7% of pre-tax income.
We expect full year tax provision to be 34% to 37%, with increases in the fiscal 2008, including a full year for the CSK stores, which predominantly operate at higher tax rates. Excluding the non-cash acquisition related charge EPS, first quarter on an adjusted basis was $0.63 per share, which represents an increase of 31% over the prior year.
For the year, adjusted EPS was $1.10 a share, a 25% increase over the prior year. The only remaining acquisition charge is amortization of trade names and trademarks incurred as part of the purchase price allocation in accordance with generally accepted accounting standard 141.
We will amortize our remaining value over the next year and half as we convert all of the stores to the O’Reilly brand. For the year, the impact of this non-cash charge would be a reduction of GAAP EPS of $0.03.
Moving on to the balance sheet, the O’Reilly average per store inventory at the end of the quarter was $505,000, which was a 7% increase from $472,000 as of last June. The increase was driven by the excess inventory in the system related to store conversions and the end of a major vendor consignment program.
For the CSK stores, the average per store inventory increased from $511,000 at the end of March to $530,000 at the end of June. This increase is a result of our ongoing line conversion process.
The average CSK store inventory in excess of the average O’Reilly store is the result of duplicative inventory in the CSK system as a result of these extensive line change orders. When the integration process is complete, we continue to expect average CSK inventory to be similar to the O’Reilly levels.
Accounts payable of $819 million was 47.2% of inventory, as compared to 49.3% in the prior year. Our APD inventory ratio was negatively impacted by the excess inventory in the system related to the extensive line changing processes, the elimination of a major consignment program with one of our vendors, and continued pressure on one of our vendors caused by the distress in the credit markets.
Moving on to capital expenditures, CapEx was $80 million for the quarter, bringing the year-to-date total to $231 million. We are lowering our estimated 2009 CapEx from $400 million to $420 million.
This reduction is a combination of savings from the northern CAL’s, DC relocation, which Ted spoke about earlier. In the original plan, we were expected to buy this facility, but we were able to obtain a favorable lease, which reduced our CapEx by approximately $30 million.
The remaining reduction in our expected ‘09 CapEx is a result of timing with these deferred expenditures moving into 2010. Depreciation and amortization grew $38 million, and we anticipate full year depreciation and amortization to be approximately $150 million.
Total borrowings at the end of the quarter were $797 million, which brings our year-to-date net increase to $64 million. The increased borrowings we expected based on our plan to invest additional dollars in the CSK store’s inventory, develop DC properties and convert stores.
As of June 30, $447 million of availability under our IBM; primarily based on our reduced CapEx spend, we now estimate we will incur $60 million to $90 million of additional debt for the full year. Cash flow from operating activities was $66 million versus $97 million in the prior year quarter.
Year-to-date cash flow from operating activities was $152 million versus $215 million in the prior year. Both the quarterly and year-to-date decreases, the result of investment and inventory related to the product changing in the CSK stores offset in part by higher net income and depreciation.
Stock option expense for the quarter was $3.6 million, compared to $1.6 million in the prior year. The year-to-date stock option expense was $6.9 million compared to $2.9 million in the prior year.
The increase was driven by the options issued in conjunction with the CSK acquisition. For the quarter, the reserve for LIFO decreased by $29 million, as we finalized product acquisition related notes, negotiations with our vendors, and prices decreased especially for those products priced primarily for these commodities.
To recap our guidance, same store sales guidance for the quarter, core O’Reilly and converted stores was 4% to 6%, the CSK comp guidance was 1% to 3%, and the consolidated comp guidance was 3% to 5%. Our GAAP EPS guidance for the third quarter is $0.53 to $0.57 a share and 138.2 million shares.
For the full year 2009, our comparable store sales guidance for O’Reilly and converted stores was 4% to 6%. The CSK comp guidance was 1% to 3%, and the consolidated GAAP guidance was 3% to 5%.
We are raising our GAAP EPS guidance for the year to $2.06 to $2.10 on 137.7 million shares. Excluding the non-cash charge for names and marks, which is the only related charge we expect to take in 2009, we expect adjusted EPS to be $2.09 to $2.13.
At this time, I’d like to ask Mia, operator to comeback and we’ll be happy to answer your question. Mia.
Operator
(Operator Instructions) Your first question comes from the line of Scot Ciccarelli with RBC Capital Markets.
Greg Henslee
Good morning, Scott.
Scot Ciccarelli - RBC Capital Markets
Can we talk a little bit about the comp depression of the converted stores? I know, there is major timing issue depending on when stores get converted, etc.
Can you just help us reconcile the plus double digit comps we’re seeing after call it, 15, 16 weeks and the negative 3.4% that we saw posted in the quarter?
Greg Henslee
Well, Scot you’re talking about what we referred some of the stores we converted on the year end call, I believe. Several of those Checker stores did really well out of the gate.
In that, we explained that we were excluding the first four weeks of the, of those stores converging with us, because the negative trend continued and that was their performance at that point. What we gave you for the whole comp or at least the Checkers store comp, the decrease of 3.4% includes those stores that were converted in the second quarter and includes the performance of those stores as they continue to try to climb out of the negative trend that they were in.
The 51 stores that we reported on at the end of the first quarter they were converted before the end of the year, as I mentioned in my prepared comments, continue to comp positive. This time of year what we are up against is comparing against CSK numbers, which has some effect, is that they were extremely heavy promoters of all products, both non-automotive and automotive, and we don’t have nearly the promotional activity they’re going on, as compared to them.
And for that reason, the double digit comps that we were saying aren’t happening, but we continue to gain traction on the wholesale side, and overtime, we’ll continue to build the retail business. So we feel pretty good about and how we’re doing with the converted stores, and obviously, they’re not comping double digit, as some of the others did out of the gate in the middle of the winter.
Scot Ciccarelli - RBC Capital Markets
And, Greg, just a clarification, when you guys do the full conversion, we know that the stores have to kind of fall in the hole, as you mentioned, but are those stores comping down? Is it double digits?
Is it down 18? Can you just give us an idea of how much of a hole they have to dig themselves out of?
Greg Henslee
Well, it varies by store obviously, and there are some of the stores that were comping double digit coming into the conversion and the double digit negative I mean, comping negative double digit coming into the conversion, and it takes a little while to dig out of that. So yes, we had some that were comping like that, and some that were doing okay into the conversion, and they obviously comp much better continuing the trend that they were on.
Yes, there were some of those Checker stores, and some other Murray’s stores for that matter that is exhibited by our [Inaudible] stores, we are doing coming into the conversion, that we’re certainly struggling prior to the conversion, and are doing better, but it takes a while, as I said, to dig out of the that they were on.
Scot Ciccarelli - RBC Capital Markets
Okay. Thanks a lot, guys.
Greg Henslee
Okay. Thanks, Scot.
Operator
Your next question comes from the line of Christopher Horvers with JP Morgan.
Christopher Horvers – JP Morgan
Thanks and good morning, guys.
Greg Henslee
Good morning.
Christopher Horvers – JP Morgan
Can you talk about the synergies? It seems like they’re running ahead of plan.
You’ve provided a number with the cost of goods synergies at the end of the fourth quarter last year. Can you talk about where you are through the end of the second quarter, on cost of goods synergies; and from accounting perspective, don’t they get hung up in cost of goods until you sell that product?
So shouldn’t the synergies accelerate into the back half of the year?
Tom McFall
Good question. To address the first part of the question, the synergies are tied to when the products replace them at CSK stores.
To the extent that we sign new deals and the O’Reilly product line exists and is already in the stores as we said, selling them, but at a lower cost. So we’re going to see the synergies build as we get the product all aligned at the CSK stores.
I think we made that comment on the last two calls. From your question of does this get hung up in inventory, you got to remember that we’re LIFO based accounting.
So the last product that we bought and in this case, the last product we brought which is at a lower cost is the first one that we sell.
Christopher Horvers – JP Morgan
And any quantification on where you are from the cost of goods side, you talked about the SG&A side?
Tom McFall
We expect to see $60 million to $65 million for the total year. Obviously, the first quarter being by far the lowest as the product line deducts changeovers, haven’t started at the CSK stores.
So we would expect it to continue to mount through the year. When you look at 2010, the $90 million that we’re estimating should be spread relatively flat across the year based on the amount of product that we move within each quarter.
Christopher Horvers – JP Morgan
Okay. So you don’t want to tell us the exact number, is what you’re saying.
And then, as a follow-up on a separate topic, can you talk about, the disruption you have a thousand stores that you’re going to convert in the West Coast starting in the fourth quarter. Is there something that you can do to change the process that will or is there something different about those stores that will make it less disruptive so the hole won’t be so deep?
Tom McFall
Well, let me kind of define a little bit about what these conversions entail, and maybe the difference between the conversions that we’ve done here in the center part of the country, as compared to those that we’ll do out West. The Checker stores in the central part of the country and the Murray’s stores that we’ve done these full conversions on.
Basically, what we’re doing to those stores is, we are pulling all of the merchandise mother stores, pulling the fixtures out of the stores in many cases, and replacing those fixtures. If we decide to reuse the fixtures and they’re relocated and the store is reset.
The display area is redefined to countermove in the POS system, basically we kind of lift clean and place the new store, and it’s extremely disruptive. Now we try our best to continue and do some business, and facilitate customers that need emergency parts and stuff like that, while we’re going through this, but it it’s a disruptive process, but it’s short.
It’s painful, but it doesn’t move very long. In the CSK stores out west, their back room merchandise will have already been changed prior to us doing any display-area conversion, and the majority of those stores really don’t have to have these huge resets of the display areas that Murray’s stores had much larger display areas from what we would typically have, and that required a huge layout reset, whereas the CSK stores in the central part of the country, but also the ones out west don’t have a big disparity between the sizes they were using as compared to what we would typically use.
So the layout doesn’t have to be changed as much. So the CSK conversions in general would be much less disruptive, because not only will the back room merchandise have been changed, thus majority of the front-room merchandise will have been changed, and the only conversion of the reset activity that will happen is we want to modify the layout a little bit, but there won’t be the lifting of inventory and the replacement of inventory we would had with these stores, which creates most of the disruption, because it makes that inventory unavailable for sale as it will continue to be available for sale with the western CSK convergence.
Greg Henslee
I might also add just from a parts specialist standpoint, the familiarity with what they’re selling, the part numbers, where it’s at in the store, all of that will be behind us at the time of the conversion, system conversion. I mean, they will be selling the brands, for months and actually even years at that point.
So from a product knowledge standpoint, it won’t be a challenge. Also, just categorically, I think the 300 stores that we finished converting, they were running in a negative comp prior to the conversions, prior to time we wanted, so we had a little deeper hole already established to dig out of.
Christopher Horvers – JP Morgan
Thank you.
Greg Henslee
Thanks.
Operator
Your next question comes from the line of Steve Chick with FBR Capital Markets.
Steve Chick - FBR Capital Markets
Hi, thanks.
Greg Henslee
Hey, Steve.
Steve Chick - FBR Capital Markets
Hi. How are you?
Greg Henslee
Good.
Steve Chick - FBR Capital Markets
A good quarter, two questions, I guess. Maybe Tom, to clarify, did you say the comment at the end there, about the LIFO reserve, is that was there a $29 million credit in the quarter?
Is that how we look at that? And I think that’s against an $8 million expense of a year ago; and if I got that number right, I don’t know if that means the FIFO group margins actually, were they down for the quarter?
Tom McFall
The answer is that it was a reduction of the reserve. So it was theoretically a helper, but you can’t take the change in LIFO and add it to gross margin and get FIFO.
Steve Chick - FBR Capital Markets
You can’t be that simple about it? I know the LIFO account can get pretty complex, but, I guess the question, well, if you can’t so were FIFO gross margins actually up in the quarter?
Tom McFall
Yes.
Steve Chick - FBR Capital Markets
You mentioned the commodity pricing fees.
Tom McFall
Yes.
Steve Chick - FBR Capital Markets
And margins as a third contributor so…?
Tom McFall
We cannot change this call into an accounting call, the answer is yes, the FIFO gross margin were up in the quarter.
Steve Chick - FBR Capital Markets
Okay. All right.
Well, we can try, probably going through the nuances offline, too. Okay.
And second, if I could. So it sounds like sales trends so far this quarter have held up very nicely.
Can you just clarify I mean, last year, we had in the southeast, a pretty big ash shortage of convert trends. So, can you talk about as we look into the quarter upcoming, as I remember it, you started the quarter off at 3% to 4% rate of growth in comps a year ago and actually ended the quarter at 1.5.
So, how are you thinking about that with your guidance? I think once again looking maybe on the conservative side and can you clarify does the comps pricing get a lot easier from here?
Greg Henslee
Yes. If I remember right, third quarter last year, the easier part of it, comparison for this year, the tougher part last year was the earlier part of the quarter.
So yes, it little bit easier and we’re just trying to be realistic in our comp guidance as we can, without being too aggressive. We’ve been on a good run here with core O’Reilly from a comparable store sales perspective and we don’t see anything in front of us within the next few months that will either change the trend the projection being that gas prices will stay fairly reasonable that there’s not going to be a significant spike in new car sales, which I didn’t know there would be that much of a difference very quickly anyway.
I wouldn’t say we’re being conservative with our guidance of 4% to 6% with core O’Reilly, but we’re certainly going to work to continue to generate comparable store sales, keeping what we’re generating right now and hopefully continue that through the quarter.
Steve Chick - FBR Capital Markets
Okay. Great.
Thanks, Greg.
Greg Henslee
Thanks, Steve.
Operator
Your next question comes from the line of Craig Kennison of Robert W. Baird
Craig Kennison - Robert W. Baird
On the commercial side of the business, the repair shops we talked to are telling us that repair part availability has become a serious problem across the industry. Is that dynamic, I guess, providing you with an opportunity to build new relationships and maybe take some share on the commercial side?
Greg Henslee
Well, we work awfully hard to make a wide array of parts available and one of the things that our industry has gone through over the past 10, 20 years is a huge proliferation of necessary to service the vehicle fleet on the road; and I feel like we’re positioned much better than most companies to provide parts and be hard to find and for that reason, as we make these that inventory available for the expanded distribution network out west, we would expect some improvement or hopefully significant improvement in our commercial business in the western stores. We continue everyday to dial in the method by which we determine what parts we keep in our distribution centers and our stores based on a vehicle population, failure rates we see, and the vehicles that exist in each market and then just demand in general.
So, I’m not sure what part of the country you guys talk to or what repair shops you talks to. Acquiring parts for the repair shop is always a challenge.
They hope to have the parts in 30 minutes no matter what kind of car they’re working on or what the part is and we work car to do that. Sometimes that’s not possible, but we feel like we’re well positioned to provide the parts as compared to minimum others.
Craig Kennison - Robert W. Baird
That is helpful. Thank you.
Greg Henslee
Thank you.
Operator
Your next question comes from the line of Brian Nagel with Oppenheimer.
Brian Nagel – Oppenheimer
Thank you. Good morning.
Greg Henslee
Good morning, Brian.
Brian Nagel – Oppenheimer
Just a couple of questions; first off, on gross margins, I appreciate all the comments you gave us in your prepared remarks, but as we look at the improvement its been a 320 basis points, which was better than the 200 basis points you showed in Q1, so isolate that incremental say 120 basis points, is that largely commodities then if I go along the three parameters that you gave us?
Ted Wise
The larger part of that would be acquisition synergies, as we completed deals with our vendors, some of the major vendors we’ve highlighted took longer to deals done combined, as we change over the parts at CSK, especially the hard part. We buy a lot more effectively than they have in the past and those are that’s the biggest, by far, piece of the gross margin improvement.
Brian Nagel – Oppenheimer
Okay. So and in the comments with respect to gross margins going forward, you think now we’re sort of past the peak point of that?
Ted Wise
There is a positive environment out there on these commodities. I think that’s when we look forward for the last half of the year, when you work through our numbers, the gross margin estimate for the second half of the year is slightly less than what was achieved in the second quarter, and that’s really coming from the expectation that those abnormally high gross margins that we’re seeing high commodity will revert to the norm.
Brian Nagel - Oppenheimer
Okay. That’s helpful and then second question I had more broad based, but with respect to the converted stores, anything changing there with the competitive response as you convert these CSK stores?
Greg Henslee
Well, our business is a very competitive business, and there are several, very solidly managed companies that we compete with and, we’ve not noticed anything different happening in the markets that we’re converting stores as compared to stores that where we were not converting stores. So although there were certainly plenty of competitors, and we work hard to adapt to everything that our competitors do, and really our philosophy has been that we have a very solid strategy.
So we continue to tweak that strategy ongoing, but we’ve not had to adapt anything our competitors are doing on the conversions and we’re pretty confident in just our ability to execute the business model as we have in the O’Reilly stores and that’s what we’re working to establish right now. I mean, we’ve not seen any big change in our competitors in those markets.
Brian Nagel - Oppenheimer
Okay and then just one final question. You gave us a lot of numbers with respect to the performance of the conversion stores in different stage of conversion.
Just overall, is that the sort of say hit to comps that you’ve seen in the early stages of these conversions? Is that consistent with, what you thought you would see before you exited into this process?
Greg Henslee
Well, these stores that we’ve converted in the center part of the country are stores in most cases that we overlap with, and when we were buying the company, we of course evaluated the performance of new stores and distribution center they were in. We could see that those stores that we overlapped with were struggling very negatively, we bought the company.
We’ve done things to try and amend that ongoing, the biggest step being to convert these stores. So most of these stores were on a negative trend to begin with and following the conversion that trend continues with the added disruption of the conversion itself, as soon as start pulling out.
As I said, the Checker store conversions, the stores that are in the center part of the country in hope, if we take all of them, they’re open and there’s a 100 days freedom I believe and those stores are comping positive so far this. So I think we’ve pulled out of the negative territory with those as a whole.
They’re now comping positive, and hopefully we’ll continue that trend as we establish these stores as stores that have better access to inventory, competitive pricing, and are serviced by a distribution center that’s giving them at least five nights a week replenishment and in many cases need times a day access to at least 100,000 SKUs, which allows them to be a very savvy competitor with stores that don’t have that kind of the excess inventory.
Brian Nagel - Oppenheimer
Okay, thanks a lot.
Greg Henslee
Okay. Thank you.
Operator
Your next question comes from the line of Michael Baker with Deutsche Bank.
Michael Baker - Deutsche Bank
Just two questions, one would have a bit bigger picture, then one maybe accounting minutiae. On the bigger picture question, so you viewed as your business, I think, a little bit defensive, does well in a poor economy.
So how do you think of things, if auto parts sales get better, cash for clunkers, etc., if the general economy stabilizes? Do you think that could pull some business away from you?
Then on the accounting question is your goodwill has been going up. I’m wondering if you could discuss what behind that.
Thanks.
Greg Henslee
Well, obviously we’ve been doing this for over 50 years, and we’ve seen ups and downs in the business with different economic trends. I’ve been here 25 years, and with different things that can happen in the economy, you see swings.
Really, we’ve done well in many years in good economies, when cars weren’t selling, and then we wouldn’t expect instruction at all for cash for clunkers program. Obviously, it may increase new car sales some and we wouldn’t think we would see a material change in demand for auto parts.
Some of the categories that are really suffering right now are truck accessories, accessories in general. Dress up parts for new cars and trucks.
We just don’t, those things are selling more and so our performance is somewhat muted by the fact that those product categories are doing very poorly and those categories do much better when new cars do sell well. So, we don’t see anything in the immediate future, at least our radar that would abruptly change demand for auto parts.
We’ll obviously keep an eye on that and we’ll report if anything that we think could cause a disruption. I wouldn’t foresee us needing to update our guidance or comparable store sales for some time to come and there is something does a real good change in the economy.
Tom McFall
On your question for goodwill, Michael; we had a year to adjust our opening balance sheet and purchase price allocation. This will be the last time it’s adjusted.
The primary reason that goodwill went up were additional liability reserves primarily related to legal issues resolving around former CSK management.
Michael Baker - Deutsche Bank
Okay. Thanks for that clarification.
Ted Wise
Thanks Michael.
Operator
Your next question comes from the line of Alan Rifkin with Bank of America.
Winston Sneasy - Bank of America
Hi, good afternoon. Thanks very much for taking our question.
This is [Winston Sneasy] in for Alan. Just to get into the accounts a little bit more.
I know you folks had said in the past that generally, a good way to think about the converted stores were that they would comp negative potentially in the high singles to double digits and then, within the four to six weeks period post-conversion, would turn flat then to positive. Just wondering if that’s still a good way to think about it going forward and then as a follow-up question, more of a point of clarification.
Regarding the Murray stores, now they represent roughly around 2% of the store base. Is it safe to assume that it’s actually less of percentage of revenues than that?
Then your reported negative 11.9 comp was that relatively in line with your expectations? Thank you.
Greg Henslee
Okay. Well, on the converted stores and when I speak of this, I’ll speak of the converted stores representing the checker conversions and not the Murray’s, but on the Checker, I think your comments are correct.
It’s somewhere in the four to six weeks following the conversion. Those stores would typically start to pull out of the negative range, depending on how far the negative they were.
Our experience has been that the Checker stores would pull out somewhere in that range. As I said, the Checker stores as a whole are comping positive so far this quarter.
So, I think your comment there relative to the comments we previously made is accurate. On the Murray stores, those stores were, I guess performing poorly to a greater degree than the Checker stores and their business model is different enough that it may take a little longer on those stores.
We’ve got a lot of effort right now going into the way we go to market, in Chicago and Detroit. We’re working to improve the performance of those stores.
There’s a whole lot of effort in our company. As a matter of fact, Ted and I spent a lot of time this morning prior to the call.
So, we’re doing a lot of things there to convert those stores to our business model. Continue to build on the retail business that they’ve done.
Those stores pose a little bit bigger challenge than the rest of CSK in general, which is the reason that we reported Murray tests separately. Murray, as you said, represents about 2% of the store base.
I would say it represents a slightly more than that as a percentage of revenue --.
Winston Sneasy - Bank of America
Slightly more, okay.
Greg Henslee
A little bit more. Those stores had a higher average per unit than what the remainder of the stores has been.
So, you’ll be finding more that the 2% that you looking from a store comp perspective.
Winston Sneasy - Bank of America
Okay, great. Thank you very much.
Greg Henslee
Okay. Thank you, Vincent.
Operator
Your next question comes from the line of Tony Cristello with BB&T.
Greg Henslee
Good morning, Tony.
Tony Cristello - BB&T
Hey, guys. I guess, as a point of clarification, Greg you noted that and I guess you could look at it two ways.
Either the 51 stores, I think, you said were actually comping positive. If you look at that group of 51 that you noted in Q1 that comped plus 4.3, how positive are those?
I mean, are they 4.3 still? Are they better or they worse than that level?
Greg Henslee
Yes. They’re low single-digits.
We didn’t put the number in the press release, and don’t want to file an 8-K by providing the exact number, but it’s low single-digits on the 51 stores that we have concluded at the end of 2008.
Tony Cristello - BB&T
Okay and the other question, then, I have is, when you look at the West Coast stores, you’ve got 80% of the line changeover in the parts there. Is it simply replenishment now that gets you going from 2% to 6% to 8% to drive the commercial, or are there what are the sort of important pieces we need to look for to know that that business is going to start to turn or what can contribute to getting those comps going at an even greater level.
Greg Henslee
Yes. Well, the reason is distribution capability assumes and I like said, 80% of the lines have been changed.
The reason the distribution capability assumes important is it gives the stores in the area around the distribution center time of the-day access, those DCs out there will have it in excess of 100,000 SKUs and our average store will have 20,000, 22,000 SKUs, something like that. So that’s the big thing that allows us to really start penetrating the commercial side of the business and then the stores that don’t have same day access to the distribution center, if they’re in the Metro, we try to augment the fact that they’re not posted DC with the hub store.
There are many stores will be in areas that might not have access to a hub store, and by having our distribution capability out there, the stores would have overnight access. During the night, they can have anyone of over 100,000 SKUs to their stores.
So they can have it first thing next morning and installer customer in that market and that’s a big thing. Those kinds of service levels are what have allowed O’Reilly Auto Parts to grow into the company that we are today; and without that, we simply can’t execute our commercial strategy out there.
Getting the distribution centers in place is a very, very important thing from a replenishment standpoint, because it allows us to deploy more SKUs and get away from some of the depth you have to have with the weekly replenishment, that’s more important just from an access to broader array of SKUs which we’re working to establish.
Ted Wise
Tony, this is Ted. I also want to add and as you know, the wholesale business is very relationship based and CSK was a retailer in a little wholesale business, so there’s a process we have to go through store-by-store, recruiting and building the ISS, installer service specialist that can be a delivery service once we get the parts and prices inline.
That is an ongoing process, and we’ve made some great headway, and continue to hope that every district manager, every REM, that’s one of their primary focuses right now is building the right key to address the wholesale business going forward.
Greg Henslee
Tony, one more thing I’ll add to that, is just from a systems standpoint, our systems, our point of sale and sourcing systems are really held to service the wholesale side of the business, and those stores will benefit significantly from using our system to look up from out of our distribution center and other stores as opposed to what they’re using now.
Tony Cristello - BB&T
Great. Very helpful.
Thanks, guys.
Greg Henslee
Thanks, Tony.
Operator
Our final question comes from the line of Gregory Melich with Morgan Stanley.
Gregory Melich - Morgan Stanley
Thanks. I had really just one question with a couple parts and it’s about the core O’Reilly store’s comp.
I’m still a very impressive performance, and it sounds like the commercial got a little bit better sequentially and maybe the DIY got a little bit of a deceleration sequentially. Could you describe that?
Are we getting that right? And then second, within that what was traffic and ticket on the retail side and was your growth into it forming more business with existing customers or winning new accounts?
Ted Wise
Yes. Well, you’re right.
The commercial business was stronger in the core O’Reilly stores than the DIY business. Not by a huge margin but it was better.
From a traffic and Tom, you have the traffic numbers?
Tom McFall
Both traffic and average ticket contributed to the positive comps.
Ted Wise
Yes.
Gregory Melich - Morgan Stanley
On the do it for me side, did you find without acceleration more about getting more items in the basket and getting more business with your existing accounts or were you able to get out and get new accounts in this environment?
Greg Henslee
Well, that’s a tough one to measure. We’ve grown our business with our existing customers ongoing; but usually, when we set up a store, we open an account for virtually everyone who can possibly buy a part for us just to make sure when they do make the first transaction, it’s easy.
So, it’s a little bit hard to measure who’s not, because generally the customers around our store will do some business with us, but I would say that we’ve probably don’t with their job penetrating our existing customers, doing more business with them, as their business has improved in the economy also, because there’s typically not a lot of customers around the store that we just simply wouldn’t be doing business with.
Gregory Melich - Morgan Stanley
Got you and finally, with a lot of the dealerships closing and that service business moving around do you think that’s helped some of your commercial accounts get more business yet, or has it not..?
Greg Henslee
Well, I think it’s helped some. I think that as these dealers close, there’s an array of things that will happen.
Sometimes that business that was going to the dealership will be disbursed out among the after market shops around the dealership. Some of it could possibly go to dealership in another area and some of it goes to new shops that are open either in the existing dealership location, because some of the dealerships are continuing service operations and used car lots or maybe another brand or something like that, and some of these highly skilled technicians and shop managers are going out on their own and opening shops, which will potentially be customers of ours.
So I would say the net-net of it is it is a positive for the after market and for us but there’s a variety of things that happen as the dealerships close.
Gregory Melich - Morgan Stanley
G
Greg Henslee
Okay. Thank you.
Operator
We have reached the allotted amount of time for questions. Do you have any further remarks?
Greg Henslee
Yes. I would like to thank everyone for their continued interest in our company.
We worked hard to move through the CSK acquisition and take advantage of the opportunities that we saw when we acquired CSK. I can tell you we feel even more encouraged today than we have, and it’s been the case as we have worked through this with the prospects of the business that we do in the western half of the country as we get in position to execute our business model.
We’ll look forward to reporting our results in the third quarter this year. So, thank you very much for your time.
Operator
This does conclude today’s conference. You may disconnect at this time.