汽車地帶 (AZO) 2001 Q3 法說會逐字稿

This is the conference call to discuss AutoZone's third quarter fiscal year 2001 financial results. Steve Odland, the company's Chairman and Chief Executive Officer, will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 9 a.m. Central Time. Before Mr. Odland begins, the company has requested that you listen to the following statements regarding the forward-looking information.

Statements contained in this presentation which are not historical facts are forward-looking statements that involve risks, uncertainties, and assumptions including, without limitation, the activities of our competitors, demand for our products, domestic and international economies, the ability to hire and retain qualified employees, and the weather. In light of these risks, uncertainties, and assumptions, there can be no assurance that any of these forward-looking statements will in fact be realized. For further information related to these matters, please refer to the risk factors section of our Form 10-K for the fiscal year ended August 26th, 2000.

Thank you, and Mr. Odland you may begin.

Thank you, and thank you to everyone for joining us today for AutoZone's third fiscal quarter results conference call. With me today are Tim Vargo, President and COO; Bob Hunt, our Executive Vice President and Chief Financial Officer; and [_______________] our Vice President of Investor Relations. Just to characterize our overall message for today, that message for the quarter is that despite a cold, wet start to the quarter, the latter half of the quarter finished very strong, and we were able to achieve improvements in same store sales, in earnings per share growth, and in operating cash flow. We will get into the specifics of the business in a moment and outlook for the fourth quarter, but first I want to address the management changes that we had announced in yesterdays press release. Both Tim Vargo and Bob Hunt are with us today, and I want to say to both of them that I have enjoyed working with them very much over the past few months, and so this is very difficult for us, but both Tim and Bob have asked to step away from their day-to-day responsibilities. They did so without really knowing about the other's situation, so the simultaneous timing here is merely a coincidence. Each of them has different family or personal reasons for requesting a decrease in their daily work demands and both will continue and I want to stress that they both will continue on as AutoZoners in a reduced capacity, so we will have the ongoing benefit of their wisdom and their experience. The other thing I think that is important to mention is that each of them has built a very strong team beneath them, so that we are very confident that we will be able to carry on effectively, but nonetheless, their reductions here and certainly the simultaneous nature of the announcements

would not have been my preference. Specifically, Tim Vargo has asked to give up his responsibilities and titles of President, COO, and Director, and at least for now, his 3 direct reports will report to me. Those are Mike Longo, who is the Senior Vice President of Store Operations, Bill Rhodes, the Senior Vice President of Supply Chain, and Brett Easley, Senior Vice President of Merchandising. We talked in the last conference call about the talents of these executives, and so I won't go in and repeat that, but I just want to assure you that all 3 of these executives are long term, dedicated, experienced, and very impressive AutoZoners. So I am very, very comfortable with our team here. Additionally, it only gives me only 2 incremental direct reports, and I think those of you who know me know my preference is to engage directly in business so this should be a very manageable situation for me. Turning to Bob, Bob Hunt has asked to retire from his day-to-day duties as Chief Financial Officer and a Director, and that is consistent for those people who know Bob, consistent with his well-known long-term plan. Bob will continue on as our Chief Financial Officer until we have completed an external search for a new CFO. Bob then will provide for a seamless transition and will continue to work with us in a reduced capacity for sometime beyond that. I think those of you who know AutoZone very well would agree that we have a very strong management team, they are talented, they are energized, and I think that you would agree that we are working very, very effectively as a team to improve and build our business. At the end of this call, both Tim and Bob would like to address their situations

more specifically, so I will stop there regarding those changes and move onto our business for the quarter. Just a few weeks ago I spoke in an investor conference about the many new opportunities and the many new possibilities that we have here at AutoZone, and I just want to review a top line, what we think some of those opportunities are. First, we are very, very encouraged by the projected increase in what we call the OKV population. OKV as you know stands for our kind of vehicle and refers to the 7-year old vehicles who really contribute to our core business. Remember that our core business is driven by that population and that our same store sales track very closely and are highly co-related to that number. The latest projections show that the OKV population continues to grow, as it has for a long time, but that the rate of growth in the OKVs is increasing for the first time in 6 years, both in numbers and as a percentage of total vehicle population. But I think underlying the fundamentals here, we have to look at the OKV population, and we feel very encouraged by what we see there. Second, we have heard quotes and seen numbers that are anywhere between $30 billion and $60 billion of recommended scheduled vehicle maintenance that is just simply not done by automobile owners each year. In other words, the amount of maintenance recommended by the manufacturers versus what is actually happening is a gap here of an opportunity between $30-60 billion and when we look at the DIY industry in total, which is only

about 34 billion, if we could successfully remind customers to do this maintenance, we could significantly increase the size of our industry. So anyone who has heard our new advertising campaign has recognized that that campaign is targeted to talk up the benefits of proper maintenance. First from a safety standpoint, do our customers really want to be stranded on the side of the road if their fan belts or hoses break? From an appearance standpoint, our customers really want to protect the finish on their vehicle with proper wash and wax. And to save cost, automobiles use less gas when the air filters are clean, and of course, this is an especially salient point today with today's gas prices where they are. The next whole area of opportunity is in the categories of expandable consumables, as we call them, and those are the kind of products that are in the front end of our store that are really expandable and influenced by new marketing and advertising strategies. We have added these kinds of categories a little bit in the past, and most recently, we have had some good success with it. But we would believe that there is an opportunity for a lot more. Fourth, we are very encouraged by the opportunities presented by the number of light trucks and SUVs on the road. The light trucks have increased by 5% in the past year, and SUVs have increased by 12% in the last year. The accessorizing and customizing these vehicles offer us opportunities well beyond our core business. And finally, we have begun to build on our core business, which has a very stable cash flow, and it is a modest growth business, by leveraging the marketing of our expandable and consumables areas. So to think about our business, it really breaks out

into 2 pieces, the stable, modestly growing hard parts business, which has been the foundation of our business for quite a long time, and then all the opportunity for the expandable consumables on top of that. Now before we get into the specific numbers for the quarter, I would like to ask Tim Vargo to talk about another initiative, which we have just begun, and that is our in-store micro-merchandising effort.

Thanks Steve. We have really got some exciting things going on in our stores, and to some degree, it is like stepping back into the past when AutoZone had just a few stores. Over the years, we have developed a great model for our stores. Our stores are clean, they are very well organized, and they have the parts that our customers need to repair their vehicles. And of course, we have got great AutoZoners to help our customers. Over the past few years, though our competitors have learnt frankly how to copy most everything we do, and we are not as different as we used to be. Our hard part selection is, of course, tailored to the specific store based on the vehicle population surrounding that store, but most of the front end of the store is the same, and it's displayed the same in all 3000 of our stores. We have recently decided to ask the store AutoZoners for help in merchandising the front end. We have allowed the store manager to customize the front end merchandising and to some extent the mix to capitalize on the real selling opportunities that occur in their store. They can change the end-caps, put baskets in the aisles, put different products under the front porch counter, and sign the stores, as they believe their customers would like to see. Now it is difficult to quantify the impact of this program, but it really appears to be working. Also, our store managers really love the idea of being able to apply their knowledge and expertise directly to their stores, and as their sales increase, they can see the results in their paychecks. We have recently simplified the bonus program to give the managers even more incentive to grow sales. I am going to turn it back to Steve, and he is going to talk about the numbers for the quarter.

Okay. Total sales for the third quarter were up 7.6%. Same store sales were up 4.6%, which is just a little higher then the 2% to 4% range that we had talked about previously. Retail or our DIY business was up 4%, and commercial was up 11%. Our comp store sales, especially at the end of the quarter, were helped by a number of things, and usually, we blame the weather when things are not so rosy, and so we really do need to give some credit to the weather here in this past quarter. Weather was good, and we think we were helped by that. The second reason is our advertising. Our new ad campaign really came out in the last 6 weeks of the quarter, and while it is difficult to measure the results of advertising, what we have measured looks good, and we do know that it has generated some excitement and some increased brand awareness for us. Third, we have added some new merchandising categories such as sunglasses and wheel covers and neon accessories and cell phone accessories and so forth, in the stores, and those have been very successful for us at building the transaction size. Next, the store micro-merchandising initiatives that Tim just described, went into effect in this past few weeks, and again it's hard to quantify, but it appears to be generating incremental sales and really more importantly the enthusiasm and the morale on our stores, especially in the last part of the quarter, really has surged, and we are very, very proud of all of our store AutoZoners and the tremendous job that they have been doing. So that's sales. Now gross margin for the quarter was 42.3% compared to 42.5% in the prior year, and you recall in the last quarter we had

some inventory issues, and excluding those issues in the second quarter, the gross margin then was flat versus the prior year. Well, those issues impacted the third quarter by only 20 basis points, resulting in an improvement this quarter over the last, and again this quarter, excluding those 20 basis points, is flat versus year ago, at gross margin. So we are comfortable that the issues that we faced, that were mostly systems related, have been resolved. Next, our operating expenses for the quarter were 31.1%, which is up 61 basis points. Now as we previously announced, we have increased our investment hurdle rates for our new stores, and as a result, we have cutback the expected store openings for this year. Three-fourths of the increase in our operating expense ratio was due to a charge related to sites that were in our development pipeline that do not meet that new hurdle rate, and so we have taken a charge to take care of those sites. The remaining increase in our operating expenses include an increase an advertising as we discussed in the last quarter, little higher insurance costs compared to a particularly low insurance cost in the later part of last year, and a very small and manageable increase in utilities costs. This resulted in earnings, before interest and taxes, of $127.9 million. Interest expense for the quarter was 23.8 million, up from 17.4 million in fiscal 2000, as we had higher borrowings and slightly higher interest rates which were up about 60 basis points over last year, but now are starting to trend back down. Our income tax rate has increased by 50 basis points to 38.8% from last

year, but that's primarily because we have increased the number of stores in states with higher taxes, predominantly New York and California. So we reported a net income of $63.5 million and an earnings per share of ¢56, which is up 12% from the ¢50 per share reported last year and slightly ahead of the consensus estimate for the quarter. Briefly, year-to-date sales were up 6% to 3.18 billion, same store sales are up 3%, with retail or DIY sales up 2%, and commercial up 11. Year-to-date earnings per share of $1.30 is up 10% from the $1.18 level for the year-to-date period last year. Now I would like to turn it over to Bob, and he will talk about the balance sheet and the cash flow.

Thanks Steve. On the balance sheet, total inventories at the end of the third quarter are up 7% year over year. Inventory in our domestic auto parts business is up 2% on a per store basis, and that includes some inventory related to our new merchandising initiatives for the season that Tim talked about. The total working capital is down 37% from last year showing some really good improvement, particularly in the ratio of accounts payable to sales, and we talked about that being a goal last quarter to improve our performance there, and we realized that. So working capital to sales ratio of 3.8% is considerably better than last year's 6.6%. Looking at net fixed assets, there are up 3% year over year. We opened 23 new domestic AutoZone stores in the quarter, for 82 year-to-date, with domestic auto part square footage up 5% versus prior year. We also opened 3 new stores in Mexico. We replaced 5 stores in the quarter for a total of 13 year-to-date, and we closed one store bringing the year-to-date total of closed stores to 3. More importantly, total net assets employed in the business at the end of the quarter were 2.28 billion and that's down 3% versus the prior year. Our debt of 1.39 billion is up 15% from the prior year in the third quarter, but more importantly is down 8% from the 1.52 billion in the second quarter. Since the end of the quarter, we've completed two financing transactions that lengthen the average maturity of our debt. One is a 5-year private placement of $150 million, the other is the renewal of the short-term portion of our revolving credit facility just completed at the beginning of this week, and within that facility, $200 million will be termed out for 2 years. This will have the effect of reducing our

commercial paper outstandings to below $500 million. Looking at cash flow, and if you are looking at the charts on our website this would be chart 11, got a lot of numbers here that I will go through rather quickly, so it might be helpful if you can see that chart. We had an excellent quarter. Operating cash flow was 228 million that was helped by the reduction in working capital. After capital spending of 44 million, pre-cash flow was 148 million, and that cash was used to settle 57 million of forward share repurchase contracts leaving 127 million for debt reduction during the quarter. In other words, debt was reduced from 1.520 billion at the end of the second quarter to 1.393 billion this quarter. Looking at a trailing year, operating cash flow again exceeded $500 million. Capital spending was 207 million, reflecting the slower pace that we talked about earlier. Free cash flow for the trailing year was 348 million, and much of the 525 million in share repurchases that you see on the trailing year basis were settlements of forward contracts from last fiscal year. Looking at the share repurchase program let me give you an update on that because that was a key driver in the earnings per share growth. At the end of fiscal 2000, we had 1.25 billion authorizations for share repurchase, 871 million of which was done on balance sheet at that time and 280 million was in forward contracts for a grand total of 1.151 billion. As most of you know, we use forward contracts to more closely match our share repurchases and our cash flow in the business, and this also allows us to buy more aggressively when the share price is weak, as it was last summer. This fiscal year, we increased our share repurchase authorization by $100 million, and through the end of the third quarter, we have increased our

total repurchases by 112 million. In the last quarter, our total repurchases only increased by $18 million. I know it's a little complicated between the on balance sheet and the forward, but bear with me here. We still have $131 million in outstanding forwards at the end of the third quarter. It's an average price of about 2260, so good value, and we will be taking some of those shares on balance sheet during the fourth quarter, and we still have $87 million remaining on our share buyback authorization. Let me finish with a comment on our interest coverage. It's a ratio we've always been proud of. We finished at 5.4 times interest coverage for the third quarter, and if we look at the trailing year, it was 5.1, so a very strong performance there. I will turn it back to Steve.

Okay. Turning now to some of our other operations. TruckPro had a pretty good quarter with sales up 6% and same stores sales up 5%. Same store sales were flat for the first half of this year, however. This truck business continues to be a very tough business, in total, with some of our competitors having significant financial difficulties. In fact, one of our largest competitors has filed for bankruptcy during the quarter. This business is slightly profitable for us, but it does have much lower operating margins than the rest of our company. In Mexico, as Bob said, we opened 3 stores in Mexico during the quarter, and our very first store in the interior, all the other stores are along the border. We plan to open about 5 more stores over the course of the coming summer, and so far, all of our stores are tracking well. Mexico is a good market for auto parts, but as I have said before, the supply chain issues are very challenging for anyone who would be looking at Mexico. ALLDATA had another good quarter with very strong sales and profit growth, and we believe that ALLDATA is such a valuable tool to professional mechanics, that we want to continue to work on ways to leverage ALLDATA in our commercial program. Now turning to outlook for the fourth quarter. First starting with sales, we are a little bit concerned about the possible impact of gas prices on how many miles will be driven, and miles driven are an important factor in our business, as that contributes to the wear and tear of the vehicles, but our advertising and our displays in our stores are attempting to show customers how to save on gas mileage, so

hopefully we will be able to recoup some from that initiative. We are optimistic about those and all the other initiatives that we've spoken about and we don't believe that the economic slowdown would significantly impact our core business and some actually believe it could be a positive. From an expense standpoint, expenses are planned to be up year-over-year, due to advertising and promotions, but we do expect to read some of those benefits back on the top line. Prior year comparisons, as you may recall, include a 30 basis point favorable insurance expense last year and the impact of the gain on the buying back $10 million worth of our bonds, so as you look forward to the fourth quarter, I have to consider those issues in the prior year. Earnings per share expectations for the quarter from, an operating standpoint, have not changed. Assuming that we achieve comp store sales in the 2%-4% range, we are comfortable with the first call analyst consensus estimate of ¢96 per share for the fourth quarter. However, as we have discussed before, we do expect to have some non-recurring charges in the fourth quarter. As we previously said, we've begun a process of reviewing all of our under performing assets. That analysis is underway, and that is likely to result in additional charges in the coming fourth quarter. We do expect most of these charges to be non-cash, and I am sure people will have questions for us afterwards related to the size and so forth, and we don't have answers for that today since the analysis is still underway, and we won't have answers until that analysis is

completed. We will open 20-30 new US stores in the coming quarter, which is a significantly lower rate than last year, but the hurdle rates will be projected to be higher. We now have 3,000 stores in the US, and we were pleased to announce last week the opening of store number 3,000 in Cicero, Illinois, just outside of Chicago. We have really come a long way since 1979 when we opened our very first store, called AutoShack then, in Forrest City, Arkansas, and beginning with that first store, we have focused on serving the customer better than anyone else. Over the years, we have provided a tremendous amount of value to our customers, and we are focused on providing value now to our stock and our bondholders. We intend to capitalize on our leading role and vehicle solutions and to really push forward in finding more ways to serve our customers and to continue to build those sales, so that's where we are headed. I would like to turn now, as promised, to give Tim and Bob just a few moments to talk about their personal situations, and then we will open up the rest of the call for questions, so with that, Tim?

Well, I'd like to take the moment to thank Steve and the Board of Directors. They have been very supportive for the past 3 years as my family has struggled with serious and continuing health problems. These health issues have reached a point where I can no longer sustain the effort required for both my AutoZone responsibilities and my family responsibilities. Having said that, I want to let you all know how excited I am about the direction of our company, and I do look forward to working with our management team in the future. I think we have got lots to look forward to, and I am excited, and I believe all of you should as well. So thanks to all of you, I have enjoyed working with you, and hopefully will get to see you in the future as well. Thanks Steve.

Thank you Tim. Bob you want to say few words too?

Yes. Before I do, I do need to make one little, I know Joe is giving me a hint to make one little correction. I think I said free cash flow for the quarter. Do you have the numbers in front of you Joe? I think I transposed 148. It should been 184 million for cash flow. The number is correct on the chart. As Steve said, those who know me know that the timing of my retirement is very predictable. When I rejoined AutoZone in 1994, I committed to Pitt Hyde to stay for 5 years, and John Adams asked me to stay through the search for his successor on the transition to Steve's leadership. With that done, I feel now is a good time for me to plan on turning over CFO responsibilities and assume lesser responsibilities. I have total confidence in the company and the great management team. I look forward to continuing to work with Steve and the team and continuing to contribute to the future of AutoZone. I also want to thank Pitt Hyde, Andrew Clarkson for the great opportunities that they have given me over the 17 years since I started with Malone & Hyde. I also want to thank my colleagues John Adams and Tim Vargo, who I have so closely with in recent years, and also the great finance team at AutoZone. I'd also like to thank Steve Odland and the members of the AutoZone Board for their continued support, and I look forward to continuing to contribute to the futures success of AutoZone.

Thank you Bob, and I think in both Tim and Bob's case, I think that everybody understands these are their personal and family situations, and I am disappointed to lose them in their day-to-day responsibilities, but I am very gratified by the fact that they will be able to stay on and provide their leadership and wisdom and experience to all of us. So Tim and Bob, thanks very much. We would like now to open up the call for your questions, and I think we have just under half an hour to take those.

Thank you. And at this time, if you would like to ask a question please press '*' and then '1' on your touchtone phone. Thank you. At this time, please press '*1' on your touchtone phone. Our first question comes Brett Jordan, and your line is now open. You may ask your question. Please state your company name.

Advest. Just a quick question on, I realize you can't give us a feeling for the magnitude of the charges in the fourth quarter, but could you give us a feeling for what sort of hurdle rate you are looking for and how you are going about the analysis on return on investment?

Brett this is Bob Hunt. We are just going to go though the entire balance sheet and scrutinize all the assets there, but obviously, some of the things that'll get some particular attention would be the store base. Historically, we have only closed about 1% of our internally developed stores for poor performance. Most of the closings that we report in our numbers are essentially really relocations of stores, and that's a cumulative number. In other words, we say that 99% of our stores have been successful and maybe that's just a little bit optimistic. With a higher hurdle rate, maybe that closure rate over time might be closer to 2% and maybe there's a little bit of catching up for stores that perhaps we would have closed in past years if we were using today's tougher standards. But we will have to wait and see. The analysis in progress is in progress, and we don't have an account on that, but it is something that we are taking an active look at.

Okay.

But that doesn't mean there are impairment issues again, as if those have been in place we would have recognized that under FAS21. But it's really for stores that have kind of a low cash flow and a possibly high realizable proceeds that we could recoup that capital and re-deploy it to an investment with a higher return. And on a similar basis, TruckPro has a store base, a little bit higher average investment, a little bit lower return, and we will obviously take a look at those store by store. That's sort of an example of the kinds of things that we will be looking at.

Okay. Next, a question on Mexico, from a contribution standpoint, if you work through the supply chain issues, is that meeting the objectives? I mean it seems like the sales are going quite well, but once you work through the total effort involved, are you getting the returns you expected?

Yeah. I think the Mexican business clearly from a sales-to-store standpoint, we are pleased with, and today we are actually pleased with the level of profitability. It is not a big contributor, but those stores along the border where we have easy access from the US, as we move into the interior, it will be the supply chain channel and just when you get to the free trade zone are more complicated, and that's what we are really talking about, is going forward as we expand into the interior. So we are looking for ways to develop that supply chain and to make sure that it does contribute to us as we grow.

Thank you.

Thank you, and our next question comes from Alan Rifkin, and sir your line is open. Please state your company name.

Alan Rifkin from Lehman Brothers. First of all, Tim and Bob best of luck in the future to both of you. Steve could you maybe talk about the timing of the search going forward for both a new President and COO, as well as the CFO, and will that search include any internal candidates?

Well, first of all, we can't replace Tim. He is irreplaceable, and we don't intend to create a search for a President and COO position. I think, as I stated, it would be my intent to take on Tim's three direct reports and to try to provide the integrated leadership. And, in fact, that's really the way we have been operating anyway, and Tim is still available to us for the amount of time that he has. In Bob's case, we will initiate a search immediately for an external CFO. We have, we are subject to the market on that, and I think those searches can take up to 4 to 6 months in some cases. We put priority on it, but at the same time, we have the luxury of having Bob in place until that search is completed, and Bob has not put any definite timetable on that and is very flexible on how long that takes. So we'll search as long as it takes to get the best person.

Okay. And with respect to the review of the under-performing assets, what percent approximately of your store base today is performing below the new higher hurdle rate of 15%?

Alan this is Bob Hunt. It's tough to answer that because a lot of the newer stores take some time to get to that hurdle rate. So it's really trying to project out which ones won't need it ultimately, and we obviously will live with stores that are below the average. You always have things that are below the average. Our focus is going to be on stores that have very low long-term potential. And again, even with that, it's going to be a question of comparing the positive cash flow to whether there are realizable proceeds on potential divestments or if we have opportunities that would lease renewal points of being sensitive to are there some leases that we just shouldn't renew when we have that opportunity. If you look at the really under-performing stores, it's for us, because our investment per store in the small boxes is relatively low compared to some other forms of retail, it doesn't take a whole lot of cash flow for us to get a small return. We just want to up the standards going forward and re-deploy the assets where we can, to get a better return.

Okay. But do you think you could be limited to about 2% as you said?

I think, if essentially we, the long-term failure rate of stores for performance rose from 1% to 2%, that's still a pretty high success rate in the retail business. I think that the long-term factor is that with higher hurdle rates, though eventually we should trend to a bias towards more successful stores with better performance over time.

Okay. And then with respect to the share repurchase. I mean realizing that you still have $87 million left, based on your aggressiveness over the past couple of years and realizing though that your stock is approaching 52-week highs in here that you may scale back from that, can you maybe talk about the potential for further authorizations going forward?

Well Alan, we've always said we look at this opportunistically, and over time with 87 million available to us, I can tell you we will continue the program. I think you can look from our past experience that we have been pretty prudent in how we used it. We kind of jumped on it at the $21-$22 share price, and we have been slower buyers of it at a higher level of price, but we have said that it is a long-term strategy for us to have an on-going share repurchase program and that it depends not just on the share price at a given point in time but on our confidence level and the cash flow generation of the company which we are feeling really good about and the credit markets which are trending a little bit better. So we've got to put that all together in the mix, and we'll decide, month-to-month, how we're going to proceed.

Okay. Thank you very much.

Thank you, and our next question comes from Matthew Fassler, and sir your line is open. Please state your company name.

It's Goldman Sachs, and thank you very much. A couple of questions if I may, first of all, Steve given that you have been in the CEO slot now for a few months and you've talked about the ROI hurdles that you've set, this is a company that over its history has at times generated some truly exceptional returns on capital, what's your thought process as to your ultimate goal for return on capital?

Well, I think you're right Matt. As I have looked at, the historical performance of the company, we have had higher returns on capital in our past, and I think that that's what encourages me that the returns today can be improved. And so what I have focused on is not setting an arbitrary number, but really to make sure that all of our investments that are discretionary, meet the kind of hurdles that will add shareholder value, and so we really carry that theme throughout every investment in the company. That goes to stores and capital, but it also goes to the way we think about investing money in marketing and so forth. So I don't know that I want to set an arbitrary number on it, but I do think that business is capable of much more, and I hope to make sure that we start delivering on improvements there.

Right. Okay. Two other questions really that follow up on questions on the quarter. Within the 13% comp growth that you saw from acquired businesses, which I guess would be Chief, Auto Palace, and the Pep Express stores, can you tell us which ones were strongest and which ones would have trailed that 13% level?

Let me take a look. We're starting to see, certainly at the end of the quarter, an improving trend in the former Auto Palace stores and the stores in New England, and I think a lot of you on the call can relate to the switch in the weather, that the quarter started slow for us, but when the weather got better, we really started to see a resumption of a growth rate that had started to slow down a little bit in Auto Palace. So we're feeling pretty good about that. Chief has been a pretty constant grower of the pace from last year, but it's still showing good growth, and we're showing excellent growth also in the Pep Express Stores. I mean we really aren't giving the specific numbers, and want to get away from doing that, but all three groups are showing good contributions to that 13% for the acquired stores.

But it would sound like that within the quarter, Auto Palace might have been a little short of that number?

Auto Palace is probably a little short and had a very strong finish and is looking like a very strong, we think they have the potential to continue that strong performance.

Gotcha, and within the commercial business, can you talk about any changes in the number of stores in the program and also quantify that business with a dollar number?

One number we didn't give out that we typically give out is our commercial store count at the end of the quarter was 1,492 compared with 1,484, so we're adding to that program, and as you saw, I don't have the number right in front of me, but the commercial same store growth was very strong. So we're very pleased with that result.

Okay, and finally, the stores that you closed, just a little detail. Were those all original AutoZone stores or were those acquired?

The stores that we'll be reviewing as part of our strategic plan and as a planning process and review of under-performing assets is an ongoing basis. We'll be reviewing all the stores in the chain. Again, what I mentioned earlier is we have closed very few organically developed stores. We, obviously, closed a lot of stores in the acquired base because of overlap issues, but the review that's going on now that's just beginning will be a review of every asset on the balance sheet, every store in the chain.

And if you look at the one store that you closed, just flat out closed, and the five that you replaced over the course of the quarter, were those organic or acquired stores?

I don't know which store we closed; I don't know which one...

Not a critical detail. Thank you very much.

But my guess is it was a lease renewal of a poorly performing store, and it was one where we just had the option to get out of it, is my recollection.

Great, thanks.

Thank you, and our next question comes from John Lawrence, and sir your line is open. Please state your company name.

Yes, Morgan Keegan. Steve I know it's early, but can you comment just on any categories of some of the new products that have worked really well the last few weeks?

Well, I think that our sales in the latter part of the quarter have been good around the store, and again, I want to give some credit to the weather for that, but I think that the new categories that we've added have all contributed. All of those, by the way, were experimented with and tested in some form, so we had a decent idea of what they were going to do when we broaden them, and in fact, the performance has been consistent with that. That's going to be a hallmark of what we do going forward. I want to make sure we have lots of experiments going on and take 10-20 stores here and try this and that, measure things, and then as they're proving to be successful on a small scale, roll them out. So if we have enough irons in the fire that way, then certainly we can always have new things ready to go, and some of these new categories, and I think I mentioned some of them, they're small in the whole scheme of things, but they really contribute to our sales per square foot.

And also, have you seen any change in real estate pricings for future sites? I mean some of the retailers have mentioned that. Have you seen anything there?

Well, I don't think we've seen anything that is highly unusual. As we've expanded beyond our base in states with low base cost in real estate, of course, we're vulnerable to just the higher market conditions, but we haven't seen any material change on balance that would change the economic model.

Right, thanks.

Thank you, and just a reminder, at this time, if you would like to ask a question, please press '*' and then '1' on your touchtone phone. Our next question comes from Jack [_______________], and sir your line is open. Please state your company name.

Fourteen Research. My question primarily has to do with the fourth quarter prospects. First of all, you're going up against much easier numbers, as you know, for the fourth quarter last year when things were pretty depressed and your sales you just reported were up against much stronger numbers versus the third quarter a year ago. So I'm wondering if you're being particularly conservative in just 2% to 4% comps, particularly with the organic stores. I'd also like to know regarding the SG&A expenditures two things, one is to what degree would your advertising budget be higher than a year ago, and also something else you mentioned previously, was better cost management. Could you expand on that too?

Let me start with the sales. First of all, in the third quarter, the comparisons versus a year ago varied really by a week, and one of the things that has really struck me is how sensitive we actually are to the weather, and you wouldn't think we are sensitive to the weather, but when it rains, nobody comes into the store and when it's a good day they tend to come in, and I think as I've looked at week to week last year, trying to trace the variations in the same store sales numbers, you can track it to a large extent to variations in the weather. I think on balance though the range that we're talking about, I think is a good range, I think it's achievable, but to the extent that the sales are also vulnerable to gas prices, it certainly is a no, no. Bob you want to take the SG&A component?

Well, on the SG&A side, we are going to have, as we alluded to earlier, a higher advertising number for the fourth quarter, and we also have the two items that we mentioned that were benefits in the year ago number, the 30 or so basis points for the insurance side and then the gain that we booked on the sale of the bonds. We're not looking to have expense leverage on an operating basis, again before any nonrecurring charges in the fourth quarter. On the other hand, on the gross margin side, the guidance we gave last time, again on an operating basis, that we expected to resume year-over-year improvement in the fourth quarter. So that should be a help, but we do have some tough comparisons on the cost side, and we do have the discretionary spending that we really want to do on the advertising and promotion side as well.

What would be the increase year over year in the advertising budget, like 10% or something, whatever the number is?

I don't think we're prepared to quantify it, but if it's something that we mention, it's not insignificant. Again, it's not so much that we're doing something unprecedented or higher levels, is we are still below the peak level of spending as a percent of sales that we typically have done historically. That number had trended down, and we're trending that number back up, and we're excited about the ways that we're spending that money. I think Steve can address that. It's not a huge number; it's not a small number. Sorry, I can't be very specific on it, but it's just an item that's big enough to warrant mention for the quarter.

I think the material piece to this is that the advertising is more effective. We had a campaign out there that was a longstanding campaign, and advertising over time wears out. So this is a new campaign with a more direct message, and so we expect it to on dollar for dollar, that will be more impactful.

What is the same store sales growth where you would get positive SG&A leverage, at least in terms of the payroll budget?

Well, I think that payroll is planned bi-week, it was planned out in advance, but then it's adjusted by a week for whatever sales. So I'm not sure you can track a high correlation with same store sales and the leverage because we have the ability to adjust the payroll to some extent. I think the important thing is that we're looking to make sure that we plan accordingly and plan conservatively enough that we're able to give us some upside if we have some favorability on the top line.

Is there anything in corporate overhead that you're controlling better?

Well, certainly as we've looked, in the same fashion that we've looked throughout the entire balance sheet, we also have looked to the entire corporate office and SG&A expenses, and we've taken opportunities to adjust our overhead in the way we're spending our dollars. We talked about some of those in the last quarter, and we will continue to do that because it's very important, as a retailer, that we count every penny, and that's the attitude that we take, and so we will adjust headcount in ways and organizations to fit our strategic plan and in order to make sure that we are controlling our cost base.

Thank you.

Thank you, and our next question comes from Peter Caruso, and sir your line is open. Please state your company name.

Merrill Lynch, thanks. First, Tim and Bob good luck. I'd like to ask a question related to these new categories that you're putting into the stores. Many retailers in the past had categories and it sort of has a onetime effect on their sales unless they really have a competitive advantage in terms of what they are adding. So can you just address, when you talk about going after the wide truck accessories in a more concerted fashion, are you going to become a destination store for those, either in the form of having a competitive advantage with respect to price or selection, or is this going to be more of a convenience impulse type of businesses, that you're going to go after?

I think, it's more the latter. Actually it's a very interesting question because the merchandizing strategies of various companies, I think, are driven to a large extent by their underlying economics, first of all by their exposure to economic cycles and fashion. And our business typically has not, even though we are in specialty retail, and we haven't been subject to those kinds of swings. So I think what we have is an opportunity to leverage the 5 million people that are in our stores every week, and who are coming primarily because of our base core business, that is our steady stable cash flow business, and leverage that traffic more from an impulse standpoint and the excitement standpoint. So I think that it's a very interesting question because as we add to the categories, it's not the type of thing where we'll add them and then just bank on them for 10 years. I think we're going to have to be more creative and rotate categories in and out, be more innovative in our merchandizing. I view that as a huge opportunity for us, and it requires a different mindset for us, so...

And are you going to be bringing in a new class of buyers to help in those different kind of businesses, or what you have today you think is sufficient?

We have built our merchandizing team over the past 6 months under the leadership of Brett Easley, and we have added capability in the area of the impulse items. So I think we're actually in very good shape. We've got some very strong people and very innovative and creative people.

Okay, thanks. Good luck in the next quarter.

Thanks very much.

Thank you, and our next question comes from Mark Schindler, and sir your line is open. Please state your company name.

Hello. I'm with Dain Rauscher. Thank you very much for taking my call. I see that over the last 3 years that you've grown your sales and your earnings in the 16%-17% range, and a few years ago, the market used to give you a higher multiple, about 25 times your earnings. It looks to me as though you're only trading about half the market multiple. Do you feel as though the company is significantly undervalued at these levels?

I was going to ask you the same question. I think that you're asking a fundamental question of what drives market multiples, and I think the person who really understands that can make a lot of money doing a lot of different things, but I believe that this company has the capability to grow better in the future. I believe this company has the ability to deliver higher returns on capital, and to the extent that shareholder value and multiples are driven by return on capital, then I have to believe that people will begin to recognize us for that.

Great. Thank you so much.

Thank you. And our next question comes from Charles Siegel, and sir would you please state your company name. Mr. Siegel. Sir would you please check your mute button.

Hi. Hearing about some of your initiatives in marketing and reinvesting in the business, are you still comfortable with next year, or could there be some fine-tuning?

Well I think that we've talked long term about our ability to deliver 15% earnings per share, and we're in the process of developing our strategic plan, as we've said many times, and we will develop a more finely tuned operating plan for our fiscal 2002, which begins at the end of the summer. So we really haven't developed plans specificity enough to give any guidance on the coming fiscal year. But I'm optimistic that the opportunities that we've described strategically can begin to bear fruit.

Could you just talk, philosophically, about reinvestment in the business? How you think about it?

Well I think that we have brought sort of a new focus to how we consider investment, and we've talked about the hurdle rates, mostly as they're related to the new store development. But really those hurdle rates should be applied to any discretionary kind of investment. So we've begun to look at every, what we call, discretionary kind of spending, and we've begun to apply the same hurdle rates for ourselves. Tricky sometimes to define what certain projects or what certain expenditures will deliver, which is why it is required that we begin to experiment more and measure more, before we deploy them in a broad based way. So again, we're trying to take a more analytical fact-based approach to make sure that all of our investments deliver shareholder value.

Great. Thank you.

Thank you, and sir at this time I show no further questions.

Well, then I would like to thank everybody, and I'd like to once again thank Tim and Bob for all their tremendous service, and again, Tim and Bob are still going to be part of AutoZone and an important part of our management team going forward, but certainly thank you for all of your years of service. And with that, I'll close the call. Thanks very much everyone.