汽車地帶 (AZO) 2002 Q1 法說會逐字稿

Steve Odland, the company's chairman and chief executive officer will make a short presentation on the highlights of the quarter. The conference call will end promptly at 10:00 A.M. Central time, 11:00 A.M. Eastern time. I would like to remind all parties, Your lines have been placed on a listen only mode until the question and answer session. Also, today's conference is being recorded. Before Mr. Odland begins, the company has requested that you listen to the following statement regarding forward-looking information. [MAN]: Statements contained in this presentation are forward-looking statements, these statements discuss, among other things, business strategies and future performance. These forward-looking statements are subject to risks, uncertainties and assumptions, including, without limitation, accuracy of estimates, competition, product demand, the economy, inflation, gasoline prices, the ability to hire and retain qualified employees, consumer debt levels, war and the prospect of war, including terrorist activity and availability of commercial transportation. Actual results may materially differ from anticipated results. Autozone undertakes no obligation to publicly release any revisions to any forward-looking statements contained in this presentation, to reflect events or circumstances occurring after the date of this presentation, or to reflect the occurrence of unanticipated events.

Thank you, Mr. Odland, you may now begin.

Thank you for joining us today for Autozone Incorporated's 2002 first fiscal quarter conference call.

With me today are Bob Hunt, Executive Vice President and Chief Financial Officer, and Emma Jo Kaufman, our Vice President of Investor Relations. The slides complementing our comments are available on our website, www.Autozone.Com. Just click on investor relations to see them and follow along with today's conference call. Well, we've had a great quarter and a great beginning to our 2002 fiscal year. Let me begin with the review of the key drivers of our quarterly results and then I'll get into the specifics. A lot of things are going right at the moment and when it happens it can have a dramatic effect on the bottom line. First of all, we're in a dynamic and growing industry and that growth is accelerating with the increase in the population of what we call our kind of vehicles or OKVs, which are cars and light trucks that are seven years old and older. Moreover, growth in our industry is not hurt by the economic slowdown. The number of miles driven may actually increase with the lower gas prices and as people choose driving over flying. Secondly, our sales are strong and we're growing market share and the industry is expanding via more effective advertising marketing and by adding new merchandise. Third, our profit margins are improving as we implement our strategic plan. New merchandise, better product costs, some strategic pricing and relentless expense discipline have helped us restore and begin to exceed our historically strong EBITDA margins. Fourth, our cash flow and financial returns continue to improve. The cash flow annuity that our hard parts business provides, when combined with the increased hurdle raised for all new investments, should drive a steadily growing cash flow and improve in return on invested capital.

And finally, our share buy back program is a further boost to earnings per share. We bought more than a third of our shares back at bargain prices and that will contribute significantly to shareholder value. Now I'd like to cover each one of these points in more detail. Let's start with our industry. Our core business is the do it yourself or DIY automotive after market. The size of that industry is a $37 billion industry and it has groan at a five-year compounded average growth rate of 5.7%, by any measure, this is a strong, robust industry. There are very -- there are many factors which give us confidence in the continued growth of the sector. Number one being the accelerated growth in the number of cars that are older than seven years. That's important because that's the age at which a vehicle is generally out of warranty and into the repair and maintenance cycle. Not only are the number of older cars increasing because of the strong production seven years ago, but because of the recent economic slowdown, older cars may be increasing relative to the total vehicle population. Although the recent incentive programs have sustained new car sales for now, it seems likely that new car sales could slow. We think our industry may also benefit as people choose driving over flying, certainly holiday traffic has shown a trend towards driving and more miles driven improves our business as cars then require more maintenance. In addition, the automotive after-market industry association, or the AAIA, has estimated that $60 billion of maintenance is left unperformed each year.

Remember, our total size of our business is only $37 billion, so, this is a great opportunity for industry growth as if we could achieve that level of maintenance, we could double or triple the size of our industry. And as many of you know, this industry has gone through several years of consolidation, resulting in a significantly reduced rate of square footage growth, which is another positive for same-store sales. Looking at our P & L, we are very pleased with the results of the quarter. There are two key drivers of this dramatic improvement. First, we have some of the best same-store sales in all of retailing, and second, we have a greatly-improved EBITDA margin. Let me start with sales. We had a very strong sales number for the quarter. Our sales were $1.18 billion and they are up 11% from the prior year, with same-store sales up 8.6%. Sales were strong in both DIY as well as in our commercial market. DIY comparable store sales are up 8% and commercial is up 14%. Our sales increases reflect an increase in both average ticket and customer count. This is great news because usually as new customers come in the average ticket size goes down as those users are lighter users. In our case, both measures are going up. These strong same-store sales results suggest that we are helping to drive the industry growth. We also are executing better and increasing our share of the market in DIY and in commercial. There are some factors in the macro environment that may have helped sales as we've discussed, more older cars, lower gas prices and the fear or hassle of flying, all resulting in more miles driven.

But, we believe that the steps that Autozone has taken significantly fueled our sales. The market has been very receptive to our marketing campaign. You may remember that in the third and fourth quarters of fiscal 2001 we started our "Get-In-the-Zone" campaign. Our ads have been primarily emphasizing the importance of routine maintenance and specifically the effect of maintenance on passenger safety. This quarter, safety became an even more important issue for Americans. So in this quarter, Autozone's ads included items like headlights, fix a flat, extra fuses, jumper cables, cell phones' hands free headsets, batteries, belts and hoses. These kind of items begin to tap into that $60 billion worth of undone maintenance each year, and as we grow sales in this area, we are expanding the whole market. Sales were also impacted by our merchandising initiatives. We are focused on improving the selection available to our customers. Through our version of category management, which we call line reviews, we have identified opportunities to add more profitable SKUs, and we have improved our in-stock positions. Our merchandising people have done a terrific job working with our vendors as we relentlessly create the most exciting zone for vehicle solutions. Just as an example, antifreeze is typically sold as a concentrate. This requires the customer to mix 50% water with 50% antifreeze. But this quarter we started selling pre-mixed antifreeze. You just open the bottle and pour it in.

It saves time, it saves mess, and it's particularly attractive to the light DIYers. This is an example of a simple innovation that has helped drive our sales and add to our margins. Again, this is just one example of how we are approaching merchandising. There are countless opportunities for further innovation. In this quarter alone, we added about 200 new SKUs and five new product categories. But despite this, our net inventory was only up in line with our sales. In our Autozoners in the stores are doing a terrific job of taking care of our customers. As customers need more help in diagnosing their vehicle problems, we are trained and we are ready to meet the customers' increased demands. Sales per square foot in the quarter increased 7% from $58 per square foot from the $54 per square foot for the quarter, as same-store sales increased and as we had become more selective on adding new stores. Sales productivity in our newest stores continues to improve. That is we're getting better than 10% higher average weekly sales in the stores opened in the last year than we did in the stores opened the year before. And we continue to add market share and commercial as we improve the way that we serve those customers. Now turning to the gross margin. The trend in gross margin remains strong, with our growth at 43.9% in the quarter, which is up slightly from the trend we established in the 4th quarter of 43.8%, but well above the 41.9% level we reported last year. Last year we had margins on certain commodities that were depressed like oil, antifreeze and free-on. Those margins were below the historical norms.

Our new merchandise has been additive to gross margin. And as we continued the process of detailed category management, we continue to find additional opportunities to strategically alter our pricing and to reduce our product costs. Now turning to operating expenses, our operating expense ratio improvement is evident in the numbers. For the quarter, the operating expense ratio was down 84 basis points versus last year, to 30.7%. Despite this year's bonus accrual, which is about 35 basis points higher than last year, due to the business results that we've had in the quarter. Now, this year's bonus for management will be EVA-based, which combines earnings and return on capital, encouraging shareholder value creation. At the store level our operating expense leverage was driven largely by the increase in sales as would be expected. At the company store support center, expenses in actual dollars, excluding the bonus accrual were essentially flat versus a year ago. The change in the counting for goodwill reduced our operating expenses by about 17 basis points or a penny a share after tax. So, just to recap, if we exclude the favorable goodwill effect and the unfavorable bonus effect, we got 100 basis points of operating expense leverage in the quarter. You know, we've talked a lot about our advertising campaign, now, in gross spending on advertising is up a little bit. However, net advertising, which is adjusted after vendor co-op is added is actually down a little, which means that we've had very, very good vendor support in this area, especially on all the new merchandise.

And because we have stores nationwide, we have been able to shift to use more national network advertising which costs far less for more coverage. So, we're getting a much higher effectiveness from our ad spending without the significantly -- without significantly increasing our costs. Now turning to mexico. Our mexico stores continue to be strong performers, but we are still working through, of course, our long-term supply chain issues. We remain confident that we can continue to profitably grow this business at a modest pace in the future. During this quarter, we opened one new store in Encinada, bringing our total store count in Mexico to 22 stores. Also, our Alldata subsidiary had a great quarter with strong sales and strong profit growth. So, we ended the quarter with 2,999 domestic stores across 43 states. We opened 15 new domestic Auto zone stores in the quarter and replaced six old Autozone stores. We closed 35 stores in the quarter as announced in the fourth quarter of last year and as we had planned. The reserves for these closings were recorded in the fourth quarter of 2001 and we covered them in our last conference call. In fiscal 2002, we expect to open about 100 stores in the United States. So, all of this resulted in operating income of $156 million, up 40% from last year and as a percentage to sales, our EBITDA margin was 13.2% of sales, up 281 basis points.

Now, interest expense for the quarter was $19.4 million, down from the $23 million in the first half --- I'm sorry, in the first quarter of last year. With lower debt at the end of the quarter from last year, and lower interest rates on our short term borrowings. This is the first year-over-year decline in interest since we began our share repurchase program in 1998. We expect to continue to benefit from deleveraging as our cash flow continues to improve. Our tax rate was down slightly after increases in recent years. We expect at least 50 basis points year-over-year improvement in the tax rate for the balance of the year. So, net income was $84.1 million, which was up 56% over the prior year and earnings per share was 76 cents per share, up 65% from the 46 cents per share reported last year. I hope you'll agree that we've made some huge strides in this quarter, in our new initiatives and hard work have paid off. Now I'd like to introduce Bob Hunt, our Executive Vice President and Chief Financial Officer, to review the balance sheet and our cash flow. Bob?

Thank you, steve.

We remain very focused on the management of the balance sheet as a key part of our goal of improving return on capital compared to the prior year. As we've said previously, our goal is to achieve an after-tax return on capital of at least 15% for this fiscal year and we've made good progress toward that goal in the first quarter. Let's review the balance sheet highlights. I'll be comparing our first quarter results to the balance sheet for the first quarter a year ago. If you're following this on the website chart, it should be chart 7. Inventories were up 12% in total for the quarter and up 11% on a per store basis for the domestic auto parts business. That's about the rate of increase that we had in the fourth quarter, but remember that a year ago, we achieved a 4% decrease in per-store inventories as we implemented supply chain enhancements such as [pole] replenishment. This year we've added SKUs and hard parts accessories and customization, and we're enjoying a very strong in-stock position. We're also very well stocked on winter goods and can't wait until some of that really cold weather hits for us. We've also gotten some help from our vendors to fund this increase. Payables are up 13% versus last year, so the increase in net inventory is 11%, pretty much up in line with sales. Total working capital of $175 million was down 16% versus prior year. And that's 3.5% of trailing year sales, down from 4.6% of trailing year sales in the prior year. Here we had the benefit of higher accruals for taxes, bonuses, and reserves related to our restructuring charges, which I will talk about in just a minute. Net-fixed assets were down 3% versus last year as the result of lower capital spending and the write-down of certain assets. I would summarize this as the benefit of increasing hurdle rate on invested capital. Our debt at quarter end was $1.281 billion, a decrease of $127 million or down 9% of the prior year level of $1.408 billion.

Equity of $910 million was up $14 million from the prior year and up $44 million in the quarter. In some, we've reduced our net assets by $113 million or 5% compared to a year ago. Our balance sheet is stronger as we reduced debt and increased equity compared to a year ago, and that's summarized on chart 8. On a trailing year basis, our free cash flow topped $400 million, our record high. We used that cash flow to buy back $281 million of stock and reduce debt by $127 million. With the share repurchase program, our cumulative repurchases including forward contracts increased to $1.477 billion, at an average price of $28 per share. That's an increase of $109 million in the quarter at an average acquisition cost of $48 a share. Most of our purchases in this most recent quarter were in the -- in the second half of september, and we actually bought back very little stock in November. We finished the quarter with $171 million in forward-purchase commitments. These shares will come on balance sheet later in the fiscal year and were purchased at an average cost of about $44 a share so they'll be nicely [inaudible] when I come on. Interest coverage for the quarter, as you would expect, showed strong improvement. EBITDA interest coverage was 8.0 times this quarter, that compares to 4.8 times last year. And EBITDA dot interest coverage for the quarter was 9.5 times compared to 6.1 times last year. After-tax return on equity is on track to exceed our goal of 30% for the current fiscal year. Let's look for a moment at the restructuring reserves that we took. As you know, the fourth quarter we took $170 million pre-tax restructuring and impairment charge and let me just update you where we stand on that.

First, there was absolutely no turn around benefit from these reserves in Q-1, in other words, no reserves were reversed into income, we had no profits from disposing of assets that were written down. Second, the total operating savings from the restructuring and impairment charge added about $3 to $5 million of EBITDA, or 2 to 3 cents per share for the quarter. And that's basically the losses of least expense for the stores that we closed, savings from some contract terminations and severance. Third, and this will be visible when we file the 10-q, at the end of the quarter, about $44 million of reserves remain. And then that will be mainly the accrued lease expense for the closed stores and excess properties and about $10 million of inventory which has not yet been disposed of. But let me just say it one more time, we got absolutely no P & L benefit to the P & L in the quarter for the inventory that was disposed of so far. Last point, we have a signed contract for the sale of TruckPro to an investment group per [abis] capital, they're based in New York and Boston. They're well on their way to securing their financing and are in the final stages of due diligence. We expect a closing in the current quarter and we don't believe we have any further write-downs that will be needed for that business. Let me also add for TruckPro, that they had a great quarter with strong same-store sales and improving profit margins. For those of you who do financial modeling, because some of this stuff will have be to back out for the balance of the year next year, let me remind you that TruckPro has historically accounted for about 3% of our total sales, 2% of our net assets on balance sheet and a little over 1% of our EBITDA. We again want to thank the entire TruckPro team for their hard work and achievements and we want to wish them well with their new partners. It is a complicated subject, so if you would like some more

detail on the restructuring reserves, we have a chart on the website. We have a lot of disclosure in note B of our annual report, but if you have any additional questions, Emma Jo and I would be happy to answer them. Now with that, I'll turn it back to Steve to wrap up with the outlook for the balance of the year.

Thank you, bob.

We may have referred to the restructuring charts taken in the fourth quarter as $170 million, it was actually $157 million pre-tax. Now, in turning to the outlook for fiscal 2002, while we have declined to give specific guidance on future earnings, I would like to reiterate some of the comments that we've made about the rest of the year. We believe that our business model has strengths in both strong and weak economies. We believe our business actually is acyclical. This has been born out by the experience of our first quarter, sales were strong throughout the quarter. So, as you update your models, remember that the same-store sales in the first half of fiscal 2001, or last year, were only 2%, then they improved to 5% in the third quarter and 8% in the 4th quarter. So, this year fiscal 2002, we're up against easy comparisons in the first half of the year, getting tougher in the second half as the year progresses. Now, we believe we can continue to grow same-store sales, and we are budgeting conservatively to insure that we maintain our expense discipline. I'm pleased to report that the same-store sales number for our second quarter, quarter to date, are up 10%, but, remember, that it's still very early in the quarter, only a couple of weeks have passed. We expect to continue to show favorable year-over-year comparisons for gross margin throughout fiscal 2002, driven by our mix of business, by our improved pricing and by lower product costs.

At the same time, we expect to see our expense ratios fall, particularly in the latter part of the year, even as we continue to increase advertising and marketing support. Our objective over time is to get back to the more favorable overhead levels that we have experienced in past years. The level of interest expense for 2002 will depend, of course, on the level of debt, and on short-term interest rates and effective working capital management. We may continue to use some portion of our free cash flow to repurchase our stock if we believe it is [acreative], but we have slowed the pace of our repurchases as the stock price has risen. And this gives us an opportunity to deleverage and strengthen our already-investment-grade credit rating. So, to be clear, we're not giving specific earnings guidance because we are not managing the business quarter to quarter or day-to-day to any specific minimum income level. We will work to deliver our best day in and day out. Hopefully this is helpful to you as you put together your projections. So, in conclusion, we are very excited about the progress that we've made and we are very pleased that the market recognizes the strength of our business and the results here at Autozone, as I'm sure you know, Autozone is one of the top performers in the S & P 500 this year. And we are committed to doing the very best we can every quarter and every year to build shareholder value over the long run. Now we'd like to open up the call for your questions.

Thank you. At this time, if you would like to ask a question, you may press star followed by 1. You will be announced by name prior to to your question. Again, to ask a question, press star followed by 1. One moment. Gary balter, your line is open, and please state your company name.

Thank you, first of all, congratulations on just a superb quarter. You deserve every, you know, the stock price and everything that's happened. A couple of questions first. One is, have you opened store 3,000 yet, and did you have a party around it?

We actually opened store 3,000 twice because we closed 35 in the quarter which dipped to us 2,999, so we had two parties, Gary.

Well, that's great! You can invite the analysts! [ laughter ]

Could you talk about how much of the comps reflect pricing versus unit increases and how much of the concept, as you can break it out, reflect new SKUs versus, if you had some type of comp of existing--- I don't know if you break that out or if you want to break that in.

Well, here's a way to think about it. Pricing, you know, we think about pricing very strategically. The only way we change pricing is through our comprehensive category management process. We go deliberately, everyday, through a category and we cycle through each category over the year. We work if with our vendor partners to do that and we work very closely to try to optimize the pricing that we have on a SKU by SKU basis. In many, many, many cases, that has resulted in SKU pricing going down to adjust to various market conditions. In some cases, SKU pricing goes up. The whole point is to try to find the optimization of pricing and as it relates to our volume and our profitability in that category. So, that's the way we view our ongoing pricing. Clearly, our existing categories have done well in same-store sales as, in mature stores demonstrate, and as the mature categories demonstrate. But our new merchandise also has contributed in many cases with a higher gross margin. So, as we've added categories, it has -- it has contributed to the gross margin. So, that's the way we really think about strategic pricing.

One --- one last thing then I'll get off. We get a lot of calls on people concerned about what's going on with new car sales and how much they've ramped up and the concern that there'll be more used cars --- less used cars out there, and our answer is we're not seeing the scrappage, because these cars are still out there. What do you --- what are your comments when you get that question on the strength of new cars currently and the potential negative impact that can have on your universe?

Well, you know, we look at the actual results, and we know that the incentives coming out of detroit and other -- from other car manufacturers, have really helped to prop up new car sales in the quarter and we're -- you know, we're pleased it by that. That's going to help us seven years from now. But we have not seen any dramatic change in the --- in the used car population out there, in fact, you know, one of the latest studies from the Automotive After-Market Industry Association, shows that the average number of cars proved DIY household has increased over time, which suggests that those cars are staying on the road longer and contributing to our sales growth.

Thank you.

Thank you, Alan Rifkin, your line is open, and please state your company name.

Thank you, it's Alan Rifkin with Lehman Brothers. I will also add my congratulations on an absolutely outstanding quarter.

Thank you.

A couple of questions, first, I've seen your press release that same-store sales that acquired units were up 14% on top of 12%. Steve, can you maybe provide some color on actually what is behind those numbers with respect to Chief and Auto Palace, and how would you compare the productivity levels today at the acquired units versus the corporate average?

Well, I think we've been very pleased by our ability to bring the acquired stores into the chain and under the Autozone banner. Those stores started at a very depressed level versus our chain average and so, therefore, since the transformation into Autozones, those stores have demonstrated higher levels of same-store sales. We think that there still is room in the acquired stores to grow more, versus, you know, where they have been, so, we expect continued strong growth from those areas.

Are the productivity levels of today of those acquired units still significantly below the organically-grown stores?

I think the way to think about it is, that when we bought them, their sales levels were at such a significant discount to the chain average, that they've had several years to -- to catch up here and we -- we think that that can continue over time.

Okay, and one more question, if I may. If you look back, you know, at the SKUs that you've chosen to raise prices on and you look at the sell-through today versus what it was before, you know, what is the opportunity for further SKU assortment, having prices raised as you look at your -- as you look at your assortment and as you look at your, you know, definable returns on invested capital?

Well, you know, again, as we look at pricing, you know, we do not look at it from a blanket-level across the chain, where we say we're going to just raise prices. That's not the way we think about it. We think about it through our category management process on a category-by-category SKU by SKU basis. Over time that, changes, as we're in a dynamic marketplace. So, we continue to find ways to adjust pricing, to optimize sales and profitability and I think we really do need to think about it as an optimization equation because we are, you know, we're trying to optimize our profitability in the end and, enhance shareholder value. Over time, we expect that we will adjust some prices down, and we will adjust some prices up. But don't -- don't overlook the fact we have worked very closely with our vendors to lower product costs and that some portion of the margin increase has resulted from lower product costs and finally, as we add to the new items, our mix has improved our gross margin.

Okay, thanks a lot, Steve. Congratulations again.

Thank you. Matthew Fassler, your line is open and please state your company name.

Thanks a lot. Goldman, Sachs, and good morning.

Good morning, Matt.

Congratulation s, obviously a terrific quarter. A couple of questions, I actually want to follow up, Steve, on the point that you just made about gross margins,and if you could give us a sense, if you look at the gross margin increase, what piece of it would have resulted from pricing from -- from better-buying and from NEKs, and also, what it would have been in the mix that would have benefited on the gross margins. I don't think that's something you touched yet.

I don't think that we have split it out to, you know, and publicly stated exactly what portion is from what piece of it, but I think the way to think about it is that the gross margin, first of all, the gross margin increase in quarter is only up very slightly from the fourth quarter--- of last year. So, you know, the significant changes really happened in 2001 so far, so, it's only when you look at the gross margin when compared to a year ago, that -- that the gross looks -- looks increased. And it's important to point out, once again, that a year ago, we had some very depressed margins on some of our commodity items. So, from a --- if you think about the business as we do, which is on a running rate here quarter to quarter, we actually have not -- have not, we've moved it a little bit, but really not dramatically. The gross changes over time, though, have been reasonably balanced across pricing mix and cost changes at the cost of goods level.

Related to that, Steve, you know, clearly you've, at least in terms of time, you've only just gotten started. These trends have been under way for a couple of quarters. If you think about your buying, for example, how far along are you and, you know, if you were to run, at something like the rates we've seen for the past couple of quarters for the rest of the year and we wanted to look out a year or two, is there room, you know, beyond this high 43, low 44s gross margin level and where would that come from?

Well, I think the way we view it is that we're really running a marathon here, and not a sprint. So, therefore we are looking to the long-term as we try to optimize category profitability. That's dependent to some extent on, you know, what our customers want to do. It's dependant, on some extent to, you know, what our competition does, but given the kind of status quo environment that we have, we have to understand economic sensitivity of our customers and we have to understand, you know, what our competitive situation is. So, you know, we will continue to work through our category management process and cycle the categories year in and year out and it is our job to try to innovate in our categories, every single year, to try to bring newness and value to our customers.

Gotcha. And one final question, if I may. You know, obviously, there can be a trade-off in terms of gross margin percentage and -- and pin terms, you've kept your tables ratio, you know, this quarter, flat, last quarter was up somewhat and that's obviously a fine performance. How are you, as you work with your vendors and think about your financials, balancing payment terms in the payable ratio with gross margin and what we can expect to see in the payables ratio going forward?

Well, we have been able to work with our vendors on our costs as well as our payables, as you pointed out. You know, our goal over time is to be able to provide better in-stock conditions in our stores in more products for our customers to buy. Remember we have 5 million people per week through our stores, which is incredible store traffic! And so, by adding items that will better take advantage of that traffic, remember, 80% of our -- of our customers buy only one to two items, so, -- an additional item added to that basket can have a dramatic improvement on our sales. And so therefore, adding merchandise to our stores, making sure that we have better in-stock conditions, can have a material impact on our same-store sales. So, we will continue to work with our vendors over time in order to achieve that, but at the same time, it is our goal not to have to pay for that inventory until we sell it, and so, therefore, our goal is to improve our payables ratios over time.

Okay, thanks a lot.

Thank you. Bret Jordan, your line is open. Please state your company name.

Advest. A couple of quick questions. Some of them have been answered, but to clarify the impact of --- the positive impact from store closings and restructurings that have been taken in the past couple of quarters, if you could give us a little more--- a better picture there, is it that the stores closed were diluted only in the area of only 2 to 3 cents in the prior year period, or could you tell us what the benefit was this year versus breaking out the assets versus the stores.

Yes, bret, this is Bob Hunt. Basically on a contribution basis, although the stores were losing money on a fully allocated basis that, we didn't save a huge amount on the -- on a contribution basis. But it's basically the leases, it's the store operating losses and again, this really wasn't our lowest seasonal points so those stores might have lost a little bit more money in the second or third quarter. That's the primary part of it. We had some head count reductions in severance associated with that and we have the savings from that and we've terminated some contracts, you know, some of them in the technology area, we had some old fleet-related contracts that we inherited from Chief that we bought our way out of that will provide operating savings from now on going forward. That's really the whole basket of things that generated that $3 to $5 million savings of debit savings for the quarter.

Okay. And a question on seasonality, also. It seems like we've had a very mild year nationally. When you talked about items like pre-mixed antifreeze, are you saying a delay in demand for some of the seasonal commodity products that might be pushing up comps later in the quarter if we ever do get winter or things reasonably normal?

You know, we do talk about our business in our industry as being seasonal, but when you think about the seasonality of our business compared to many, many other kinds of businesses out there, really, our seasonality is very, very modest, so, our -- our heaviest season does tend to be summer and our lowest season tends to be winter. Now, we should get the spikes in the transition -- spikes in sales during the transition of seasons, usually as people prepare their cars for the change in season. So far we have had a mild fall and so therefore we have had a delayed shift into the winter kinds of merchandise, but we're stocked and ready to go when that happens. I don't think that winter has failed to come to this country ever, so, it's only a matter of when.

And one last question, I'm not sure if you gave it earlier, but you said you were seeing improving in stocks, do you have an in-stock number for the quarter or present?

Well, I don't think that we have shared any specific metrics with that, but we have been able, through our HUB and Satellite System, to improve our in-stock conditions, particularly in the hard parts, application parts areas, so that we have the right part at the right time that our customer needs it.

Okay. Thanks.

Thank you. Mark Johnson, your line is open. Please state your company name.

A.G. Edwards, and my question has already been answered. Thank you.

John lawrence, your line is open, please state your company name.

Yes, Morgan Keegan. Congratulations, guys. Steve, would you comment a little bit on the commercial side of the business, I know there's some tests going on in certain markets there, 14% comp was great, but give us a little more insight on what's happening there and the opportunities?

Yeah, I -- you know, our business, we have about a $5 billion business and $4.5 billion of that business is on the DIY side. And we started really dabbling in the commercial business a few years ago as a way to leverage our capabilities from the DIY side, but we've established now half a billion dollar business on the commercial side, largely by selling, you know, out of our current store configuration, and we're selling currently out of a little over 1600 of our 3,000 stores, round numbers. We believe that this is an opportunity for us. We have referred in the conference call to the DIY business being about a $37 billion industry, growing at 5 to 6%, well, this -- this is a unique business in that we also have a commercial category that, if you think about parts alone, that's about the same size and growing about the same rate. So, we have an equal opportunity from an industry standpoint in the commercial area. We currently are number three, we believe, in the commercial market. But we have some unique advantages with our national store footprint and -- and our consistency of our products and so forth. And so we are moving to take advantage of our capabilities and our competitive advantages to begin to increase and improve our market share on the commercial side. This is going to be, you know, a slow, steady build in a continued effort and a continued priority for us over the coming years.

Great, thanks.

Thank you. Again, as a reminder, if you would like to ask a question, you may press star followed by 1. Again, star 1 to ask a question. David , your line is open, please state your company name.

Gidelli and Company this morning. Good morning. Just one quick question, following up that last question, when you say have increased Autozone's market share, you've gained market share in the commercial side, as well as the DIY side, or is that versus your retail competitors in the existing markets?

Yeah, David, we have increased our market share in both areas, but remember, you know, our market shares are really relatively small in the whole scheme of things, you know, with $4.5 billion worth of the $37 billion DIY side, we're just -- we're -- we're very small in total share on the DIY side with incredible upside in the market share, but also, I -- it's a great story because we have incredible upside in the ability to drive incremental maintenance. We could double or triple the size of the industry as well as have the opportunity to increase our market share within the industry on the DIY side. Well, that's even more compelling over on the commercial side, because, you know, with only about a half a billion dollars in total sales out of a similar sized industry, of course, our shares is very, very small, so, the upside there, too, is to continue to grow our market share. We have done so, but there's tremendous opportunity left for us there.

Okay. And a second question, relating to your vendors, you mentioned better product cost, strategic pricing. I mean -- in relation to your vendors, I guess they're not participating as much on the -- on the pricing side, but, I mean, what's your sense of their health or pricing car I guess in the -- in the retail side of the business? I mean, are they making it up in volume from you guys or--- I'm just trying to reconcile, you're getting better product cost and your raising prices on certain parts. I was just wondering maybe you could walk through the mechanics there.

See, our vendors, first of all, usually supply original equipment manufacturers, as well as the after-market. So, you know, our vendors are focused on multiple ways to grow their business, I think if you looked at their business, I think they would agree that their margins are -- are -- are higher over on -- in the after-market side because of the pressure and the stress put on in the -- on the OEM side. I think this is a very attractive business for them. What we do, we work very closely with our vendors to partner with them and find ways to reduce the manufacturing costs of their items and to find better sources and better ways to supply them. So, you know, it -- it's not as much, you know, power of negotiation as it is power of collaboration and helping to just do business more efficiently.

So they're not necessarily getting pricing on the DIY side, but maybe they're reducing their manufacturing cost and improving their margins in that fashion?

I think our vendors, you know, on some products they've gotten some price, I think -- you can't paint it with that broad of a brush. I think, you know, our vendors are very competitive and some of them have gotten pricing and some of them have been able to hold their prices and hold their margins by better manufacturing efficiencies and so forth.

Okay, thank you very much.

Thank you. Our next question comes from [David Verlander], your line is open, and please state your company name.

Hi, company is Basswood Partners, I wanted to ask you about your longer term plans for square footage growth. I know the merchandise initiatives have, you know, really boosted same-store sales, but you know at some point that wears off and you even talked about that, the comps are going to get tougher, so you know, at that point how do things unfold? The square footage growth really is'nt growing that much now is -- do you plan to change that going forward?

Yeah, David, we've gone through a couple of cycles on square footage growth and, you know, people who followed Autozone for a long time were told we were growing very rapidly early in our history and as recently as a couple of years ago, earlier this year, we developed a new, strategic plan and in conjunction with that plan, we raised the hurdle rates that we are requiring for all of our investments.

So, we're -- we're demanding now at least a 15% after-tax hurdle rate on all new investments, including our real estate. It was through that process that last year we called to our entire real estate pipeline and re-evaluated every property that we had in the pipeline and we cut the -- the new store opening rate in order to focus on those properties, which had the higher hurdle rates, and so it resulted in 107 stores being opened in fiscal 2001 and we said there should be about 100 open this year. It also required us to dispose of properties and write down portions of our pipeline and that was part of the restructuring charge that we talked about last quarter and that Bob refreshed our -- the update on in this conference call. However; as we go forward, we believe that with the focus of a higher hurdle rate now, we will probably have different properties, but we believe that there are hundreds and hundreds if not thousands of sites out there that can provide us profitable expansion, you know, throughout the United States. So, we should begin to increase the square footage growth over time, but just to be clear, we are not setting a

specific target on growth -- square footage growth or numbers of stores. What we are doing is saying we want to open every store we can possibly find that can meet or exceed our hurdle rates.

But -- but right now, the number of stores that are meeting the hurdle rates is about 100 per year, I mean, is that a reasonable number for us to assume going forward, you know, going out two or three years--

We expect that number to increase going forward.

As that number increases, you know, you've gone from the, you know, the efficiency mode as you transitioned to the expansion mode. Should we see the impact on margins? You know, as -- as you -- as you're spending less to expand, it's helped margins, but does the reverse hold true as you go into your expansion mode?

We don't believe in growth per growth sites, so, we will not grow just to add to the top line, we will grow only if we believe that we can do so and add shareholder value and exceed the hurdle rates in total. So, that's the way we -- you know, we look at things from a total P & L standpoint.

Gotcha, thanks.

Thank you, again, as a reminder, if you would like to ask a question, press star followed by 1. Thank you, at this time, there are no further questions.

Well, thank you very much to everyone who have joined us today and in celebration of a terrific quarter. And I would like to end by thanking you for tapping in. We'll look forward to talking with you next time. Goodbye.