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Advance Auto Parts, Inc. AAP Q4 2010 Earnings Call Feb. 10, 2011Company Ticker Event Type Date

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Advance Auto Parts fourth quarter 2010 conference call. Before webegin, Joshua Moore, Director of Finance and Investor Relations, will make a brief statementconcerning forward-looking statements that will be made on this call.

Joshua Moore, Director, Finance and Investor Relations

Good morning and thank you for joining us on todays call. Id like to remind you that our commentstoday contain forward-looking statements. We intend to be covered by and we claim the protectionunder the Safe Harbor provisions for forward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995.

Forward-looking statements address future events, developments, or results and typically usewords such as believe, anticipate, expect, intend, will, plan, forecast, outlook, or estimate, and aresubject to risks, uncertainties, and assumptions that may cause the results to differ materially,including competitive pressures, demand for the companys products, the economy in general,

consumer debt levels, dependence on foreign suppliers, the weather, business interruptions, andother factors disclosed in the companys 10-K for fiscal year ended January 2, 2010 on file with theSecurities and Exchange Commission. The company intends these forward-looking statements tospeak only as of the time of this conference call and does not undertake to update or revise themas more information becomes available.

The reconciliation of any non-GAAP financial measures mentioned on the call with correspondingGAAP measures are described in our earnings release and our SEC filings, which can be found inour website at advancedautoparts.com.

For planning purposes, our first quarter earnings release is scheduled for Wednesday, May 18,2011 after market close, and our quarterly conference call is scheduled for the morning ofThursday, May 19, 2011. To be notified of future dates of earnings reports you can sign up through

the Investor Relations section of our web site. Finally, a replay of this call will be available on ourwebsite for one year.

Now let me turn the call over to Darren Jackson, our Chief Executive Officer. Darren?

Darren Jackson, Chief Executive Officer

Thanks, Joshua. Good morning, everyone. Welcome to our fourth quarter conference call.

First, Id like to thank our 51,000 team members for their hard work and congratulate them on anoutstanding performance in the fourth quarter and for the 2010 fiscal year. Our team reached manyrecord milestones this year, both strategically and financially. A few of the milestones Im most

proud of include our tremendous growth in our commercial programs, which have generated threeconsecutive years of double-digit comparable store sales growth. Our year-end customer tractionand market share results set new records, and our team member calibration and engagementscores also reached all-time highs.

Finally, our overall financial performance saw sales and margins, profits and returns exceedexpectations. Specific highlights for 2010 include our commitment to serve customers, whichcontinued to fuel our growth and profitability, driving an 8% comp store sales gain, and a total salesgrowth of 9.5% for the year. Our operating income rate rose to 9.9%, driven by a gross profit ratewhich reached 50% of sales. Our earnings per share jumped 31.7%, with our return on invested

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capital climbing to 17.5%. Mike will provide more specific detail on the fourth quarter and full-yearresults in a few minutes.

Our organizational and strategic results were just as gratifying. The revitalizing of our core values,which are to inspire, serve, and grow, coupled with the successful execution of our four strategiesstand out as our most important accomplishments that contributed to our 2010 performance.

The key highlights include our ability to inspire as reflected in the quality of our team members andthe number of ASE certified team members, which now is nearly 7,000 and growing. Ourcommitment to serve our customers better than anyone else is reflected in our new highs ininventory availability and team member service factors, according to NPD. Our grow results arereflected in the consistent and profitable execution of our four key strategies, starting withcommercial acceleration, which generated double-digit comp growth in commercial each and everyquarter over the past three years, resulting in average commercial programs growing from 414,000to 593,000 annually for Advance stores.

DIY Transformation resulted in the development of our Service Is Our Best Part brand promise,while supporting our industry leading sales per store. Availability Excellence expanded our grossprofit rate 335 basis points over the past three years while lowering our owned inventory per store

by 28%. Superior Experience has driven improvements in our overall customer satisfaction, whileour customer-driven labor model and e-commerce site have enhanced our customers shoppingexperience.

Looking to 2011, the vital signs of our industry continue to be very favorable. The average age ofvehicle on the road is over 10 years, with nearly two-thirds of those vehicles greater than sevenyears old. Miles driven have continued to increase modestly. And consumer preference still favorsnecessity as a result of the sluggish economy and job market.

Yet, we do see potential headwinds such as rising gas prices and rebounding U.S. auto market andthe associated increase in seasonally adjusted sales. In addition, the challenging weatherconditions in many of our core markets have led to a very tough start to the year.

Q1 will be lower than our original plans and vision. And as usual, we have adjusted our annualoutlook to reflect our start to the year. History still shows us that weather tends to even out throughthe course of the year. 2010 was definitely an exception to that rule as weather favorably impactedus all year. However, there is nothing to lead us to believe that 2011 will be another exception, andwe are early enough in the quarter and the year to make adjustments to deliver another successfulyear.

Turning to a longer term view, our focus over the last several years was to catch up on missioncritical capabilities, including commercial sales, e-commerce, merchandising, and field leadershipto name a few, while reigniting our focus and commitment to our customers and team members.We certainly have closed the gap from that vantage point, as indicated in our record level customerand team member satisfaction.

Research concludes that the customers see very little difference between leading players in ourindustry. As a matter of fact, last month I received a letter addressed to the Advance Auto ZoneParts CEO. Im still not sure if I should open it. So when the customers have nothing else toremember their experience, they simply talk about price and location. Our greatest opportunity todifferentiate Advance is by providing an experience that is more meaningful and memorable thanprice and location.

Looking forward, we will focus on a single customer promise, Service Is Our Best Part. Service IsOur Best Part was the theme of our 2011 Leaders Forum that was held earlier this quarter with4,500 of our front-line leaders. I have never experienced so much enthusiasm and galvanizingfocus from a team, as we shared with the team our strategies that enabled Service Is Our Best



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Part, and they will converge from four to two, Service Leadership and Superior Availability willsimplify our focus and allow us to strengthen our integrated service model for our DIY, Commercial,and AI customers around this shared commitment.

Our Superior Availability commitment will be to get the right part to the right place at the right timeevery time. It compels us to maximize the storage capacity of our stores and warehouses as well asincrease our delivery speed to our customers. This strategy will be a multiyear journey torevolutionize availability and lower our supply chain cost, resulting in increased profitability.

Service leadership will leverage on Superior Availability. Our Service Leadership commitment is tolead with the right services and the right support at the right time, in the right way. Jim and Kevinwill provide additional insights regarding Service Leadership and Superior Availability in just a fewmoments. Collectively, Service Is Our Best Part will seek to separate Advance over the next fiveyears from an industry dominated by a property, parts and price promise.

I expect our Service Leadership and Superior Availability strategies will allow us to maintain ourindustry leading sales per store while growing our operating margins to 12% and return on investedcapital to 20%. While we believe our sales per store potential is nearly $2.5 million, our goal overthe next several years is to achieve $2 million per store, driven by our growth in Commercial as we

move towards becoming a fully integrated service model.

Ultimately, my confidence is driven by the quality, passion and track records of the Advanceleaders. In January, at our Leadership Conference, we had the opportunity to recognize a memberof our team that brings our value proposition and brand to life every day. That team member wasMike Byrd. Mike was recognized as our Regional Vice President of the Year. Mike started workingfor Advance while he was in college, and worked his way up through the company over the past 20years, holding various leadership roles within our field operations. His region is a leader in all keymetrics, and he truly has a passion for Service Leadership. Leaders like Mike, who are driving ourbusiness, demonstrate how we will win with the customer and differentiate ourselves in 2011 andbeyond. Congratulations, Mike, and thanks for all you do.

Now Id like to turn the call over to Jim Wade, our President, to discuss our Service Leadership

strategy.

Jim Wade, President

Thank you, Darren, and good morning. As always, I want to start by thanking our hard working andcommitted team for another record quarter and year. We appreciate our teams passion forproviding great service to our DIY and Commercial customers, and earning their business onecustomer at a time, and doing it through our core values.

I want to spend my time this morning taking a look back at our results for the fourth quarter, andthen talking about how were bringing Service Leadership to life in 2011.

In the fourth quarter, our team continued to do a great job executing our initiatives as well asleveraging the strong industry fundamentals to produce strong results. Our total comp store salesgrew by 8.9% in the fourth quarter compared to 2.4% during the same quarter in 2009. Consistentwith the first three quarters of 2010, we were pleased with an increase in both the number ofcustomer transactions as well as the average transaction size. Each of our major geographic areasproduced positive comps in DIY and double-digit comps in Commercial, resulting in a veryconsistent performance across our company.

We reached a few milestones in our Commercial business that were very proud of. The fourthquarter marked our twelfth consecutive quarter or three full years of double-digit Commercial comps



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in our Advance Auto Parts stores. In those three years, our total Commercial sales have grown by57% and now represent 34% of our total sales compared to 27% just three years ago. We nowhave over 40% more Commercial parts pros, trucks, drivers, and sales force in place than threeyears ago when we committed the resources to accelerate our Commercial share.

Those resources were invested in the customer. Were very excited that we finished the 2010 yearwith the highest customer satisfaction scores from our commercial customers that weve everachieved. We believe this is the true measure of our future potential in this business.

Our DIY business, again, produced strong growth and achieved our seventh quarter of positive DIYcomps in the last eight quarters, with solid positive comps each quarter in 2010. Our DIY customersatisfaction scores continue to increase as well. We continue to generate the highest sales perstore in our industry, and we gained market share during the quarter and for the year.

In our stores, we will focus on several key areas in 2011 that will enable us to serve our customerswith dependable and fast service consistently in every store, every day, by every Advance teammember. We believe that to provide a great customer experience, we must achieve a new standardof operational and service excellence, and that has to be brought to life for the customer by ourteam.

In order to enable a high level of operational and service commitment, well focus on the following.Weve increased the number of district leaders and reduced their average store count so they willhave more time to spend in their stores coaching the development of the team. We will increase theclarity of whats operationally critical for our district leaders and general managers to focus on, toachieve consistent foundational excellence in every store, and well continue to measure ourprogress.

Well continue to build on our customer driven staffing to ensure we have the right people at theright time to align with our customer traffic. Well further accelerate our team member training anddevelopment in both parts knowledge and selling skills, to better enable them to find solutions fortheir customers. Well build stronger relationships with our highest potential Commercial customersthrough the partnership of our store teams and sales force to visit and support those customers.

Well measure and well improve our delivery times and order accuracy to our Commercialcustomers, which will enable them to be more successful in taking care of their customers. Wellspread our message through our advertising and marketing programs to drive new customers toconsider us and to build our brand around our team. And well leverage to its fullest potential theincreased parts availability that Kevin will describe, along with all the tools his team is providing sowe can find the right part and get it to the customer fast.

As Darren mentioned, we held our annual Leaders Forum in January, where we had theopportunity to spend time with all our general managers, our field team, and our sales force, and toreview our plans for 2011. Were very excited about our teams commitment, and we know it will bethrough their commitment and passion that well bring Service Is Our Best Part to life for everycustomer.

Lastly, we continue to reach new customers and grow our sales through successful new storeopenings. During the fourth quarter, we opened 26 stores including three Autopart Internationalstores, and closed three stores. For the year, we opened 148 stores, including 38 AI stores, andclosed five. As of the end of our fourth quarter, our total store count was 3,563, including 194Autopart International stores.

In closing, thanks again to our team for another successful year and for remaining committed toleading inspired teams, and delivering on our promise that Service Is Our Best Part.



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Now Id like to turn the call over to Kevin Freeland, our Chief Operating Officer, to discuss ourSuperior Availability strategy.

Kevin Freeland, Chief Operating Officer

Thanks, Jim, and good morning. I would also like to congratulate the team for a strong fourthquarter and year. Ill take a moment to highlight a few of our accomplishments during the quarter,as well as update you on our initiatives to support our Superior Availability strategy.

During the fourth quarter, our gross profit rate increased 147 basis points versus the fourth quarterof 2009. The fourth quarter improvement was driven by increases in both front room and back roomcategories resulting from the rollout of our custom mix and price optimization strategies, thestrengthening of our merchandising capabilities, and the impact of our rapidly growing globalsourcing capabilities. We continue to be pleased with the strides that weve made in improving ourgross profit rate, which has increased 335 basis points in the past three years.

Through our custom mix rollout, we completed 163 upgrades during the quarter. We continue toimprove our category sales and margin rate performance on hard parts as a result of our increasedavailability and continued strength in our Commercial business. Our sales and margins inaccessories also improved in the quarter and continued to benefit from our new global sourcingcapability.

During the fourth quarter, we continued to improve our parts availability through the addition of eightHUB stores. Our delivery HUB network is at 176, providing multiple daily deliveries to 2,300 storesin addition to our 31 PDQs. In 2010, our DC productivity improved double digits over 2009 due tothe continued focus on labor standards and productivity initiatives.

Our adjusted accounts payable to inventory ratio increased significantly from 61.2% to 71% at theend of fourth quarter. Our increase in AP ratio continues to be driven by more favorable paymentterms, supply chain financing, and the timing of inventory purchases.

Our owned inventory decreased by $94 million versus 2009, while we continued to increase theamount of inventory throughout our system as inventory per store increased 10% over the fourthquarter of last year.

The customer perception of product availability continues to increase and exceeded our internalexpectations for the year. Our Superior Availability strategy is focused on driving to industry leadingparts availability.

We continue to be thrilled with the progress of our DIY e-commerce platform with sequentialincreases in all key metrics: traffic, conversion rates, and sales. Were excited about the completionof the rollout of our business-to-business e-commerce capabilities, with the ability to provide ourcustomers with increased convenience and a better experience through our new online capability.Our B2B capability gives us confidence that we continue to drive strong commercial sales growth

by strengthening our competitive position and enabling us to do business with more customers anda larger bay for garage customers.

In fourth quarter, AIs revenue grew 33%, driven by the net addition of 38 stores over the past 12months and a positive comp performance.

Overall, our fourth quarter, as well as 2010, was very successful for our team and Im thrilled by thestrategic and financial progress weve made as we focus on providing Superior Availability.



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Now let me turn the call over to our Chief Financial Officer, Mike Norona, to review our financialresults.

Mike Norona, Executive Vice President, Chief Financial Officer

Thanks, Kevin, and good morning, everyone. Id like to start by thanking all of our talented anddedicated team members for their contributions to the financial progress we made in our fourthquarter and for fiscal 2010.

I plan to cover the following topics with you this morning: one, provide some financial highlightsfrom our 2010 fourth quarter; two, put our fourth quarter results into context with both our full-yearperformance and the key financial dimensions of our transformation over the past three years; andthree, provide you with our annual financial outlook for 2011.

As a reminder, our fiscal 2009 results included the impact of store divestitures, which decreaseddiluted earnings per share by $0.03 during the fourth quarter of last year and $0.17 for fiscal 2009. Iwill speak about our year-over-year results versus 2009 on a comparable operating basis excludingthe impact of 2009 store divestitures to provide a more transparent and relevant comparison. Wehave provided both GAAP and comparable operating results in our earnings release.

Looking at our fourth quarter, we were very pleased with our strong end to the year, with earningsper diluted share of $0.57 versus $0.39 last year, a 46% increase or a 58% increase on a GAAPbasis. For the full year, our earnings per diluted share increased 32% on a comparable basis to$3.95, which was on top of a 14% increase in 2009. On a GAAP basis, our diluted earnings pershare increased 40% over 2009.

Our comparable store sales increased 8.9% during the fourth quarter, which was on top of a 2.4%comp increase during the fourth quarter of 2009, representing an 11.3% two-year comp store salesincrease. Our fourth quarter comps were driven by our 12th consecutive double-digit comp increasein Commercial, our seventh quarter out of the last eight quarters of positive DIY comps, and strongonline sales. For the year, our comp store sales increased 8%, with total sales increasing 9.5% to

over $5.9 billion.

As Kevin mentioned, our gross profit rate increased 147 basis points versus 2009, and continues tobe driven by improved merchandising and pricing capabilities, improved parts availability, andsupply chain efficiencies. The 147 basis point increase was on top of a 78 basis point increase ingross profit last year in the fourth quarter of 2009.

For the full year, our gross profit rate increased 113 basis points and now stands at a record high of50%. This is a significant achievement given the strong growth of our Commercial business, whichnow represents 34% of our 2010 sales versus 32% in 2009.

Our SG&A rate of 42.8% increased 20 basis points versus the fourth quarter of 2009, primarily dueto higher incentive compensation resulting from our strong 2010 performance compared to our soft

fourth quarter of 2009 combined with the deliberate decision to pull forward some 2011 expenses inCommercial and availability into our fourth quarter, as we highlighted during our third quarter call.However, these increases were almost entirely offset by expense leverage in our fixed coststructure as a result of our strong fourth quarter comp sales increase of 8.9%. For the full year, ourSG&A rate increased to 40.1%, a 13 basis point increase versus fiscal 2009.

Our operating income increased 38% versus the fourth quarter of 2009, and our operating incomerate increased 127 basis points to 6.6%. Our full-year operating income increased 22% versusfiscal 2009. Our operating income rate increased to 9.9% of sales for fiscal 2010, which representsa 100 basis point increase versus 2009 on a comparable operating basis.



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Free cash flow through the year was a record $466.4 million, which represents a $56.5 millionincrease over last year. This increase was primarily due to our strong growth in net income andreduced owned inventory.

Our accounts payable to inventory ratio increased to 71% from 61.2% in 2009, as part of ourcontinued efforts to reduce our net owned inventory, which decreased $94 million versus 2009. Ourconsistent and sequential improvements in our operating and financial performance over the pastthree years, along with our disciplined approach to managing our capital investments, reinforcedour commitment to accelerate growth, improve profitability, and drive shareholder value. We willcontinue to measure our financial performance based on these three dimensions.

Our commitment to growing our business is reflected by our 8% increase in comp sales in 2010 andindustry leading sales per store, which grew 6.4% to $1.7 million. Our sales per store haveincreased $170,000 over the past three years. Our ability to grow profitability is marked byconsistent and continued gross profit expansion and an increased operating income rate, whichgrew 113 basis points and 100 basis points respectively. Over the past three years, our gross profitrate and operating income rate have expanded by 335 basis points and 130 basis pointsrespectively.

As we look at our ability to drive shareholder value, we are pleased with our 240 basis pointincrease in ROIC to 17.5% over 2009, a 44% increase in economic profit added over the past 12months, and our 2010 record free cash flow of $466 million. Over the past three years, our ROIChas grown 380 basis points and our free cash flow has doubled.

Our performance was also recognized externally in 2010, with our upgrades by Moodys and S&P,bringing us to full investment grade status.

During the fourth quarter, we repurchased 2.4 million shares for $157.8 million at an average priceof $66.71. That brought our total share repurchases for 2010 to 13 million shares for $633.9 millionat an average price of $48.67. Additionally, during the first quarter of 2011, we repurchased 1.9million shares for $121.6 million at an average price of $62.72. These repurchases reflect our views

of our low valuation and our internal confidence in our companys ability to grow profitability and tocreate long-term shareholder value. As we stated in our press release, the companys Board ofDirectors authorized a new share repurchase program.

Overall, 2010 marked our third year of improved financial and operational performance. While ourperformance in 2010 was definitely buoyed by favorable weather patterns and strong industrydynamics, the strategic choices we have made through our investments and the superior executionof our team played a significant role and have allowed us to gain market share and position ourcompany for long-term growth and success.

Turning to fiscal 2011, we estimate our EPS will range from $4.60 to $4.80 per share and reflectsthe share repurchases up to the time of this release. Our outlook estimates an average share countof approximately 82 million of outstanding diluted shares.

Now Id like to provide you with the key financial assumptions implied in our annual financialoutlook. In 2011, we will continue to expand our store base and anticipate new store openings forboth Advance and Autopart International brands to be approximately 130 to 140 stores.

Our focus on Service Leadership and Superior Availability will fuel continued growth in our industryleading sales per store. We expect comp sales to grow in the low to mid-single digits, driven bystrong commercial growth and the resurgence of DIY. We expect our gross profit rate to continue toexpand, however, at a much more moderate pace.



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We will continue to reap the benefits of our previous investments in merchandising capabilities,supply chain, and availability, including areas such as global sourcing. However, we expect someheadwinds to margin from supply chain investments to fuel Superior Availability, as well as somepotential inflationary headwinds in certain commodities that will constrain gross profit expansion.

Turning to our cost structure, differentiation will require continued investments in the areas ofService Leadership and Superior Availability. We have demonstrated over the past three years thatinvesting in the right initiatives can deliver solid growth and returns, as evidenced by our strongoperational and financial performance, and we are committed to the same discipline as we embarkon differentiation. That said, we expect SG&A dollar growth per store to continue to decelerate in2011 from 2010, driven by cost savings in areas of labor management, operational efficiencies, andvariability in store performance. These savings will somewhat offset our 2011 investment spendand will result in our SG&A leveraging at a lower level of comp store sales.

We also expect capital expenditures to increase in 2011 to a range of $275 million to $300 million,principally driven by supply chain investments as part of our Superior Availability. Theseinvestments include new technology such as a new warehouse management system that will takeus to the next level of enhanced availability and supply chain productivity, and capacityinvestments, including a new distribution center in Remington, Indiana, required to meet our future

growth needs.

With our strong fourth quarter, where we accelerated our market share growth and customerscores, we expect our first quarter 2011 to build on that momentum. While we do not providequarterly outlooks, we have gotten off to a significantly slower start than we anticipated. We knowweather has impacted the start and we continue to monitor other drivers. We now anticipate firstquarter comp growth could be flat to low single digits, which could constrain our first quarterearnings. It is early enough in the year where we can adjust our plans as we learn more.

I would also like to remind you that our first and third quarters represent the most challengingcomparisons on a two-year basis, and both were significantly benefited by favorable weatherpatterns in 2010. We continue to believe the long-term industry dynamics are still in place. We havefactored all of this into our annual EPS outlook.

In closing, Advance Auto Parts has been focused on becoming more competitive within ourindustry, and we are pleased with our progress. We are focused on becoming differentiated and afully integrated service model. Ultimately, we will win with our customers through ServiceLeadership and Superior Availability.

We expect to continue to build upon the momentum of the previous three years, and well continueto be guided by meeting the needs of our customers and measure our financial progress throughgrowth, profitability, and value creation. Our talented team will continue to propel us forward andultimately help us reach our full potential.

Operator, we are now ready for questions.



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QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] Our first question today is from Gary Balter with Credit Suisse.Your line is now open.

: Thank you. Just on the gross margin, you mentioned in the press release andon the call the gross margin moderation. Could you talk about the drivers that you still have?Because obviously, you still have the supply chain opportunities. You still have some of the priceoptimization. Where are you if you had to put yourself on a youre at 100%. Are you at the 50%level, 75% level on some of those?

: Yes, Gary. This is Kevin. The gross margin calculation for us, there areover a dozen components that we take a look at. Theres, as you mentioned, price optimization, theglobal sourcing, supply chain efficiency, category management, shrink, the mix front room/backroom, DIY, Commercial. Its a fairly complex interaction. And at any one moment over the last threeyears, some number of them were headwinds and others were tailwinds.

As we look out into next year, were continuing to have tailwinds in areas like price optimization that

is moving to our Commercial business, the global sourcing thats expanding. But were alsobeginning to make investments in areas like supply chain, which are long-term tailwinds. But shortterm, opening up a new distribution center will impact the immediate numbers. So I think long term,were bullish that we can continue to enhance margins, but well have a materially diminished ratein 2011.

: On that, it leads into the follow up question. Could you talk a bit more about theinvestments youre making in supply chain and what you envision that will provide for you?

: Sure, two things. One, as Mike mentioned, were opening a distributioncenter in Remington, Indiana, which will bring the fleet of full-size DCs from nine, including AI, toten. And were putting into that facility a new warehouse management system, which is a materialimpact on our IT spend for the year.

And essentially, weve not opened a new distribution center in a number of years despite theincrease in the store count and the comp increases that weve had. And that new facility willessentially allow us to keep up with the growth of the business.

: Okay, thank you. And, Darren, this isnt a question but just one thought on yourletter. You should open it and if its positive, its fine. If not, forward it on to Bill Rhodes at AutoZone.

: Thanks, Gary.

: Thank you.

Operator: Thank you. Our next question is from Matthew Fassler with Goldman Sachs. Your line isnow open.

: Thanks a lot, good morning. I want to ask a question about your coststructure. Can you give us a sense as you look at 2010 retrospectively the amount of SG&A thatyou think was discretionary related to performance? You talked about incentive comp for the fourthquarter in general and how that influences your leverage point for 2011. And any color on wherethat leverage point might be would also be helpful.

: Hi, Matt. Its Mike. So turning to 2010, I think what we said is and really,2010 finished three years as we built up capabilities, and weve been investing in the business inthings like Commercial and our availability strategies. And what we said in 2010 is that our SG&A



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dollar growth and our SG&A per store would start to decelerate, the growth would decelerate, andwe actually saw that. So if you look at 2009, I think our SG&A per store was roughly 8.1%, and lastyear it was 6.7% if you see where we finished up the year.

So we actually did exactly what we said we were going to do. And I would anticipate SG&A in thefourth quarter came in pretty well exactly where we thought it would be. We were anniversarying, asI said in the Q3 call, incentive comp from 2009. And then with our strong comp in 2010, that wasabout an 80 basis point difference in incentive comp. So if you back that out, our SG&A came inroughly where we thought it would be in Q4 of 2010.

Turning to 2011, first of all, were still going to have to invest in the business. Were still growing inCommercial. We still are building out availability in some of the areas that Kevin talked about.However, we see savings opportunities in areas like goods not for resale, occupancy, improving thevariability in our store performance, being able to leverage some of our labors from some of theinitiatives that Tamis talked about before by our customer driven labor model. And we anticipateour SG&A growth will again slow from 2010 in 2011. And I anticipate that our SG&A per store willgrow in a range of roughly 2% to 4% versus where it grew last year at about 6.7%.

: Thats very, very helpful. And does some of the variability between the

2% and the 4% depends on sales as it relates to the incentive comp and paying out your teammembers?

: Yes, thats exactly it. Id love for it to be at the high end of that range becauseour sales came in better than we thought. So that picks up our variable, it picks up ourdiscretionary, and it picks up our investments. We dont break that out, but we try not to predict andI think that gives you a good enough range. But youll see from that that will allow us to leverage ata much lower comp level than we did this year.

: And then the last part of the follow-up, if I may. As you think about thecadence of expense growth, last year was unusually high I think in Q1 as you made someinvestments and obviously had a very good sales number, and then again in Q4 given the incentivecomp that you just cited. Should we think about the year-on-year growth in SG&A reflecting those

compares? In other words, as you cycle very big spending, you might be able to have it up at thelow end of that range as opposed to other quarters when it might be in the middle or high end ofthat range.

: Yes, this is what I would tell you, Matt. I would expect that our growth so Igave you that range of 2% to 4%. I would expect a little bit more growth in the first half of the yearand a little bit less growth in the second half of the year.

: More growth in the first half of the year?

: More growth, higher growth in the first half of the year because youve got theannualization of what we did in the back half, and less growth in the back half of the year.

: Got it, thank you so much.

Operator: Thank you. Our next question is from Scot Ciccarelli with RBC Capital Markets. Your lineis now open.

: Hey, guys. How are you?

: Were good, Scot.

: Hi. Intuitively, it makes a lot of sense that rising gas prices, the rising star ison the headwinds for the company and, frankly, the whole industry. But I also know you guys are



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incredibly analytical. So I was just wondering if youve been able to quantify the kind of impactyoure expecting from either of those variables. If youve been able to find any correlations that youthink you can point to as to sizing the impact?

: Yes. So, Scot, this is Darren. The truth is we look in many different places.If you look out to NPD, they use many of those variables. And if youre just to use what they thinkthe world will be in 2011, they think the market will grow another and this is total market, another6%. And so they factor in everything from where unemployment is, to revolving credit, to SAARs,projected SAARs growth, to miles driven, and they all factor in there. But at the end of the day, whatyou recognize is theirs too is just a guess in terms of where it can be. I think if you actually lookedacross our industry, we all guessed wrong in 2010. It was actually much stronger, and weather didplay a part in that.

As we look to 2011, the way were looking at it is the structural pieces of the industry, just they havenot changed. The cars are getting older. You know what? We may see SAARs go to 12.5 millionthis year. That is a small increase in terms of the overall cars out on the road today. We dont thinkscrappage rates are going to change a ton in terms of the marketplace.

In gas, we do know its probably, from a DIY point of view, I think were up $0.50 a gallon as we sit

here today. We know from history that that will cut into pieces of our business today. But I thinkthose are all different types of crosswinds that we have in any one year. The weather that wereexperiencing right now is that on the one hand, it is cutting into our business. On the other hand, itis actually building wear and tear on those cars that should show up in the shops, in our shops,later in the year.

: Fair enough, thanks, and I guess just a quick follow-up. If you look at thecomp performance between yourselves and your major competitors, theyve been virtual mirrors ofone another over the last eight quarters. And when I look at that and then I look at all theinvestments you guys have made into your own business, how do you evaluate the changes thatyouve made outside of comp because obviously everyone is doing pretty well right now or havebeen doing pretty well over the last two years?

: Scot, let me just say I appreciate that question. Its an excellent one. Thethings that I pay attention to, and Ill use one example so we can get other questions, is when youlook at our focus on the Commercial business, naturally the headlines get 12 quarters in a row ofdouble-digit comp store growth, which is fantastic.

The things we dont publish that I pay attention to is that our customer satisfaction scores, and ifyou imagine a Net Promoter Score over the last two years has risen a full 10 points. And to rise afull 10 points in commercial customer satisfaction says to me that in a business that quite franklythat we were a little late to the party to in terms of having some of the national brands, a little late tothe party to in terms of B2B capabilities, online capabilities, a party that we were a little late to interms of a commercial sales force investment, to move commercial customer satisfaction a full 10points, I dont think you can find other examples in the industry of moving the customer perceptionthat fast in that short a period of time.

And its not lost on us that in our SG&A line, if you said whats making up that difference, by andlarge, its our investment in people because our hypothesis is, over the long term, if we win thecustomer relationship part of the business and we see those metrics moving in the right place, thatwill continue to grow when the market finds its way back to where it used to be in terms of growthtrajectory.

: And Scot, I would just build on Darrens point two things. When you pin in onjust an SG&A line, thats correct. But when you look at SG&A, its what youre spending today andthe investments youll get out over the long term. So in some cases, weve invested ahead; i.e.,building a dot-com site. Thats the gift that will be giving for a long time. And then the other one is,



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others of our competitors have spent dollars, but theyve spent it in different buckets. So I would justask you to go back and look at where others spent capital dollars or acquisitions, as well.

: Great. Thanks, guys.

Operator: Thank you. Our next question is from Tony Cristello with BB&T Capital. Your line is nowopen.

: Thank you. Good morning, gentlemen.

: Hi, Tony.

: I guess the question I want to focus on is, Darren, you talked andreferred to getting to the 12% EBIT margins in several years, or a few years down the road. Canyou maybe bridge the gap between where we are today? Is that totally a function of productivity ingetting that to that $2 million level? Or at some point do you then get to see that SG&A, as itdecelerates, become more of a leverageable or more of a contributor to ultimately getting to thatEBIT number?

: Yes, Tony, terrific question, again. Its both, Tony. The way that we seethe story unfolding as we move toward $2 million a store is that theres so much fixed cost in thisbusiness that if you can drive that top line, as you begin to I dont know that I love the wordoptimize, but it is optimize the operating model. So I think we just finished last quarter rolling outB2B in terms of the Commercial space to all of our stores. So less than 1% of our sales today in theB2B online space, naturally because were just finishing rolling out, is very low.

I think if you look across some of the competitors that have been out there in the industry for manyyears with that online capability, its probably closer to 20%. So there is a benefit thats ahead of usboth in terms of how we can grow the business and how that will help us leverage and optimize thebusiness going forward.

There are other examples in terms of were now past the halfway point in terms of rolling out our

Commercial wave program. And were going back in, now that we have two years of understandingin terms of those commercial models to say, is there a better way both to increase the servicelevels to our commercial customers and optimize the profit formula. Those things will take on theform of, as we look at the different transportation models store to store that are still ahead of us too.

So its not as if the whole story is its just about growing the top line, though were very passionateabout it, or its not a story of just how do we go in and remediate an SG&A line. But if you thinkabout it, what were trying to balance is that achievement of a service level above anybody elses interms of who we are and delivering growth through that and translating it into the operating margingrowth thats ahead of us.

: Okay, thats very helpful. And maybe as a follow-up, I noticed that thenumber of new AI units that are going to be opened up this year is down from where you opened

last year. Has AI reached a breathing point? Is that less of a contributor to where you seedirectionally the productivity going?

: Yes, Tony. This is Kevin. They had a significant expansion last year; itexpanded into the Florida market. Were going to have that team concentrate this year onintegration of a number of back office functions with Advance. We see material profit enhancementfrom that. So theyre basically going to go through much of what Advance went through over thelast three years, highly concentrated into this year.

: Okay, thank you.



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Operator: Thank you. Our next question is from Alan Rifkin with Bank of America. Your line is nowopen.

: Thank you very much. Darren, with incentive comp having such a profoundeffect in the fourth quarter, can you maybe tell us what the process will be for accruing incentivecomp in 2011? And will it differ at all from 2010 so that theres a more possibly timely booking ofthis expense? Thanks a lot, and then I have a follow-up.

: Hey, Alan. Its Mike Norona. Ill take that question. So first of all, our practicesin 2011 will be very consistent with 2010. We pay on growth; thats what we do. So if youremember, we changed our comp programs in 2009 and we started paying on growth. So whenyoure growing, and we love to pay out more dollars to our team members and share that whentheyre growing our business.

What happened in Q4, is that we did an 8.9% comp, so we paid for growth. And we wereanniversarying Q4 of 2009 where we didnt draw as much. Remember we did a 2.4% comp. So wehad that impact. So youre anniversarying large comp with smaller comp, bigger bonus dollars. Andthe other impact that happened in Q4 of 2009, is we have annual programs. So what happens isyou accrue those annual programs. And if you remember, we had a significant fall off in volume in

the 2009 Q4. So that was another part that impacted us. So I would say that was more a one-timething than how were accruing going forward.

: Okay, if I could just follow-up there, if you dont mind. While the comp of 8.9%was certainly above your annual number of 8%, the comp dollars in Q4, and please correct me ifIm wrong, are the lowest of any quarter. If that indeed is true, why is there such a disproportionateamount of the compensation booked in Q4?

: Yes, these are annual programs as well. So we have annual programs andwe have store programs that pay out monthly.

: Okay. And if I could just hopefully that doesnt count as my follow-up?

: No. Go ahead, Alan.

: Okay, thanks a lot. So SG&A dollar growth per store you said is certainly goingto accelerate in 2011 versus 2010. But certainly, the comp difference that youre forecasting of lowto mid-singles compared to the 8%, is a pretty significant difference. If you hit the midpoint of yourcomp guidance for 2011, could you maybe just shed a little bit more color on what you think theSG&A dollar growth per store may in fact come out to be?

: Yes. Hey, Alan, can I correct you? What I said in my remarks and what I saidearlier to one of the questions is last year our SG&A per store grew at 6.7%.

: Okay.

: And this year, we expect that to decelerate, the growth to decelerate in the2% to 4% range.

: Okay.

: So actually, our dollar growth will actually decelerate in 2011. It wontincrease.

: Okay, it will still increase, but at a lower rate.



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: Yes, thats right. Itll increase, but at a lower rate, so 2% to 4% versus the6.7% that we saw this year, or 2010.

: Okay, thank you, very much.

: Thanks, Alan.

Operator: Thank you. Our next question is from Dan Wewer with Raymond James. Your line isnow open.

: Thanks. Darren, I just wanted to talk a bit more about AI and how it fits in withthe long term Commercial strategy. As I recall, AI generates about $25,000 in sales per week perlocation, so a little bit more than twice your Commercial average in your Advanced stores. But as Irecall, the operating margins are pretty skinny, and perhaps thats whats leading to theconsolidation in the back-office. But can you talk about long term? Do you view AI as remainingessentially a separate brand? Or do you envision, at some point, beginning to integrate it into thecapabilities of the Advance branded Commercial program?

: Yes, Dan, here maybe a little bit of context. So in 2010, we opened 40 AI

stores, Kevin?

: 38.

: And so part of what we were testing in 2010, we actually went muchfurther away than the home market, Dan. And what we were testing is does the value propositionwork. And some of the hardest work youll do in business to figure out will the consumer actuallybuy. We know that business has been very successful in its home markets. And to be candid, wewere very pleased in terms of how that business performed outside of its home markets. So a lot ofthe work that weve done over the last couple years is how do we test it in other type of markets.We tested a store within a store. Im not confident that thats a winner because it just createsanother level of complexity thats hard to run within a box.

And as we look at the future, a way to think about it is we still see a world where AI is standingseparate in terms of the customer facing activities, but there are many back-office activities that,candidly, if were going to grow it faster, it can grow faster on the rails. So think about supply chain,think about some of the merchandising synergies. Today, we even have separate finance. And byand large, we have been operating it really at arms length. And now we see the opportunity tosave. If were to integrate this, and some of its about cost savings for sure, but I would say themajority of it is it allows us to position that business to grow more rapidly in different markets in thefuture. Do you have anything to add, Kevin?

: The only thing I would say is you made the comment, do we envision thisas a separate brand or becoming rebranded as Advance. There are numerous differences in themodels in that were running a model that we hope would be 50/50 DIY/Commercial on Advanceand its 100% Commercial on the AI side. We have a business that is largely branded for Advance,

and its almost entirely private label for AI. And the differences continue.

As we look at AI, as they went into the Florida market and other markets theyve expanded into thelast several years, theyre complementary to our business. Its not something that is cannibalistic.So I would concur with Darren. We have had pronounced margin expansion for Advance and apronounced margin expansion for AI would have a comparable positive impact. Weve been able tosignificantly reduce owned inventory. a significant reduction in their owned inventory will be positiveas well. So I think its taking a good brand with a truly differentiated model and allowing it to benefitfrom some of the tailwinds that weve been able to create for ourselves on the Advance side.



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: Okay. And then just as a follow-up, other retailers that have a similar customerprofile as yours have been highlighting the elimination of the tax refund anticipation loans as aheadwind in January sales. But as the IRS begins to cut those checks in February, those salesdollars should come back into consumer spending. Do you think that the elimination of those RALshas had an impact on your business thus far in the quarter, and as a result, this quarter might turnout to be back loaded?

: Heres what I would say, Dan. Jim and myself, we were traveling the lastcouple weeks to stores. I was visiting with Commercial customers. And when you listen to theteams out in the field, I mean theyre actually so much closer to actually whats going on and theywould say in January one of the challenges that theyre facing is just that. Theyre just not seeingthe level of tax money both in the Commercial accounts and showing up in our stores.

Weather is a big piece of it. If you said to me, tell me what the change is year over year, I cant tellyou what the change is. Anecdotally, that is something were hearing in the marketplace, but likeweather, it will come back. And so we tend to view it as a timing issue at this point versussomething thats structurally different.

: Great, thanks and good luck.

Operator: Thank you. Our next question is from Kate McShane with Citi Investment Research.Your line is now open.

: Thank you, good morning.

: Hi.

: Hi, Kate.

: Hi. I was wondering if you could talk a little bit about the inflationaryheadwinds that you had mentioned in your prepared comments and what your view will be onraising prices and what prohibits you maybe from passing it all through.

: Yes, Kate, this Kevin. Essentially, if you just look across all industries, theoil prices are rising and well documented. The price of steel is rising and well documented. Andobviously, we have a number of products that are based on those two commodities. The keyquestion for us is to what extent will we be able to have those cost increases reflected in themarketplace, and thats unknown.

Quite frankly, were pretty early in the cycle. Some of the products that we have, have relativelylong lead times, and we today see that as part of that deceleration of margin growth. But its verydifficult to predict at this point just what the nature of it is. And certainly to the extent at which thoseprices are reflected in the marketplace, it would be margin neutral and would actually enhancesales. You only have to look back a few years ago that that was the situation we were in as anindustry, that a certain amount of our top growth was actually being driven by inflation of the

products.

: Okay, thank you. And if I could go back to a previous question that wasasked about some of the external factors that are impacting your business, do you have a figure forwhat U.S. SAAR has to be in order to start dragging down the average age of cars? And how doused car sales come into play with this in the calculation of the average age of cars?

: I think the arithmetic is Ill get this close, but not perfect. But I think werescrapping about 14 million cars a year. So I think if we build 14,000,001, were starting to changesome of that age dynamic in the industry, Kate. And you just have to go back four years ago andlook at new cars I think its 2002 to 2006 were traveling at about a 17 million car rate. Were



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traveling at a rate still, depending on whose estimates you believe, this year anywhere from 12.5million to 13.5 million, so theres still a pretty precipitous decline in terms of the new cars comingonline.

: Okay, thank you.

Operator: Thank you. And our final question today comes from Aram Rubinson with Nomura. Yourline is now open.

: Yes, thanks very much.

: Hi, Aram.

: How are you doing?

: Good.

: I have two questions. One I guess on the sales, and then two on themargins. At least back of the envelope calculations would suggest that the spread between the DIY

and the Commercial comp widened out during the fourth quarter. Im wondering if you can verifythat or put a little bit of a range around the Commercial or the DIY. And then curious into Q1whether that spread is in fact also moving more towards Commercial?

: Yes, maybe Ill start that. Its Mike. And then Ill turn it over to Jim to give yousome insights, but we dont break out our Commercial and DIY. What I will tell you is that weenjoyed our 12th consecutive Commercial comp and we enjoyed strong DIY comps, building on, Ithink its, a positive seven out of the last eight quarters. But we dont break it out because, as weveshared before, were looking to build an integrated model. And while we have specific initiatives foreach of the different customer groups, we think about it as more integrated. Jim, do you want givesome color?

: The only thing I would add is that in the fourth quarter and in the first quarter, we

really havent seen any change in the trend between the two businesses in either case. So I dontthink what youre seeing there is really showing up in the numbers.

: Thanks, and then just to follow up on the gross margin. There areelements of the gross margin which are, of course, benefits of programs that youre instituting. Andthen on the other hand, theres always some investing thats inside that line item. As you move youraccounts payable up, Im wondering if that yields any pressure on the gross margins over time asyour mix of course moves up. Weve not seen any of those things affect pressure on the marginsover time. But I guess Im just trying to get a sense of the balance of growth. How much is newincremental programs that are benefiting, and then whether youre reinvesting that growth in somethings that may be either in price or in getting the payables and terms to where you want? Im justtrying to understand the balance between the investment and the call it the harvesting.

: Again, we had a sizable increase in the AP ratio last year, the largest weve everhad, and quite frankly, the largest of anyone in our industry, and margins went up over 100 basispoints. So weve not seen a correlation between improvement in payment terms and margin. Thatsessentially not the way the program works. So I do believe that that AP ratio will continue to growover time, and thats a goal of the company. And I dont believe that thats while we do, in fact,have margin headwinds, that doesnt appear to be one of them.

: Okay, I thank you for taking my question. I appreciate the response.

: Okay. Thanks, Aram.



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Operator: Thank you. And thats all the time we have for questions. I would now like to turn the callback to management for any final comments.

Joshua Moore, Director, Finance and Investor Relations

Thank you, Wendy, and thanks to our audience for participating in our fourth quarter earningsconference call. If you have any additional questions, please call me, Joshua Moore, at 952-715-5076. Reporters, please contact Shelly Whitaker at 540-561-8452. And that concludes our call,thank you.

Operator: Thank you. That concludes our call for today. You may now disconnect. Thank you forjoining us.


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