汽車地帶 (AZO) 2002 Q4 法說會逐字稿

Good morning.

This is the conference call to discuss AutoZone's fourth quarter fiscal year end 2002 financial results.

Steve Odland, the company's Chairman and Chief Executive Officer, will be making a short presentation on the highlights of the quarter and the fiscal year.

The conference call will end promptly at 10 a.m. central time, 11 a.m.

Eastern time.

All participants will be able to listen only until the question-and-answer session of the conference call.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Before Mr. Odland begins, the company has requested that you listen to the following statement regarding forward-looking information.

Certain 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 competition, product demand, the economy, inflation, gasoline prices, 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.

Please refer to the risks factors section of AutoZone's Form 10-Q, the fiscal quarter ended May 4, 2002, for more information related to these risks.

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.

And welcome to AutoZone's fourth quarter fiscal 2002 conference call.

With me today are Mike Archbold, AutoZone Senior Vice President and Chief Financial Officer, and Jay Cook, our Vice President and Treasurer.

I hope you have had a chance to see our press release and read about our exciting results.

If not, the press release along with the slides complementing our comments today are available on our website at www.autozone.com.

Simply click on Investor Relations to follow along.

We're very pleased to report yet another record quarter and the culmination of a great fiscal year.

Our fourth quarter continued our trend of record sales, record EBIT, record EBIT margin, record cash flow, and record earnings per share.

This quarter, we reported a 6.6 percent comparable sales increase and a 62 percent increase in earnings per share.

Now, first, a couple of reminders.

Fiscal 2002 has an extra or a 53rd week in the fourth quarter.

Also, if you recall from last year, we took a one-time restructuring charge in the fourth quarter of fiscal '01 of $92.6 million after tax.

So in our discussions today, all the comparisons to last year's numbers will be exclusive of last year's non-recurring charge unless specifically identified in order to provide an apples-to-apples comparison.

For the quarter, sales increased 12.4 percent from a year ago to $1.843 billion.

Excluding the sales of TruckPro, which was sold during the year, total sales actually increased more by 16 percent.

Same-store sales were up 6.6 percent.

Retail same-store sales were up 5.5 percent while commercial same-store sales were up 18 percent in the quarter.

Gross margin for the quarter as a percentage of sales increased 1.94 percentage points to 45.7 percent.

Net operating expenses were 28.8 percent of sales resulting in a record quarterly operating margin of 16.9 percent.

And net income was $178 million, or 9.7 percent of sales generating an earnings per share in the quarter of $1.73.

For the year, sales totals $5.326 billion, up 10.5 percent from the prior fiscal year.

But excluding the TruckPro sales, our total sales actually increased by 13 percent.

Same-store sales for the year were up 9 percent and grow margin as a percentage of sales increased by 2.2 percentage points up to 44.6 percent.

Net operating expenses declined to 30.1 percent of sales resulting in a record annual operating margin of 14.5 percent.

Net income for the year was $428 million, or 8 percent of sales.

And diluted earnings per share was $4 even, up 68 percent from the prior fiscal year.

Driven by our strong earnings increases and the declining working capital, our return on invested capital reached 19.8 percent and cash flow before share repurchases was $730 million.

EBITDA for the full year was $889 million, or an increase of 32 percent from the fiscal 2001 EBITDA of $676 million.

Now let's turn to some of the details.

First, let's look at the retail or our DIY business.

For the fourth quarter, retail or DIY sales are up 14 percent.

Same-store sales were up 5.5 percent.

For the year, sales per square foot were up 7.5 percent to $258 per square foot.

That's the highest sales per square foot level achieved by AutoZone since fiscal 1996.

These sales growth rates have continued to compare well with the rest of our industry.

New store productivity continues to improve.

And we opened 30 new stores in the quarter, closed 14 and replaced 3.

We continue to increase our market share and, more importantly, expand the entire market.

Based on information from the automotive after-market industry association, we estimate that our DIY market share has increased to 12.2 percent from 11.7 percent last year.

We continue to successfully build sales in this core business.

First, advertising and merchandising programs continue to be the primary driver of our volume.

The "get in the zone" advertising campaign continues to build store traffic a year and a half after its initial introduction.

Our creative merchandising and great in-store service continues to build our average ticket size.

So our data show that comparable store sales increases tend to be driven roughly equally by traffic and average ticket.

And as you have heard me say before, we believe that that's retail Nirvana when average ticket and traffic are going up roughly equally.

By now, everyone's heard about the $60 billion of unperformed maintenance based on the AAIA study.

Well, our advertising continues to explore new ways to remind the consumer of things they can do to make their vehicle safer and more reliable.

By doing this we expand the market for the whole industry and as the largest and only national player in the category, we reap the lion's share of that growth.

Further, we developed the only distinguishable national brand in our industry.

The front end sales growth in our stores has been invigorated with an addition of new merchandise and improvements in in-store merchandising like The Red Zone and our exciting signage.

Innovative merchandising provides solutions to our customers desire to make their vehicles more comfortable and more reflective of their individual personalities.

An example of these efforts is our work bringing together the NOS brand with our steering wheel cover, floor mat and seat cover vendors in order to develop a matching line of NOS-branded interior products.

As many of you may know, NOS is a very highly recognized and popular performance brand.

So bringing those two brand name and industries together is just another example of how we are relentlessly creating the most exciting zone for vehicle solutions every day in our stores.

We've also improved our in-stock position.

Our inventory management system identifies the right parts to have customized to each of our 3,068 stores while our supply chain assures that we get them there as quickly and efficiently as possible.

And we continue to be strategic in our pricing as a result of our very disciplined approach to category management.

Over the past year, we have reviewed every product category.

We've made improvements to our product offerings and fine-tuned our segmentation.

We've added value line products in some categories and top-of-the-line branded products in others.

We have lowered prices on some items and we found opportunities for some price increases on others.

We've added more marketing for our in-store services of loan-a-tool, starting and charging diagnosis, and battery charging.

And the new check engine light service which began last quarter.

Beginning last quarter we added engine diagnostic services.

You know, as you know, most cars on the road today have small computer chips in them.

And these chips store data on engine problems and turn on the check-engine light in the car.

Well, it's estimated that as many as 25 million vehicles are running around out there with their check engine light on.

That's part of that $60 billion worth of undone maintenance.

Well, our diagnostic specialists go out to the customer's car and read the engine codes, diagnose the issues, and, if necessary, sell the parts to address the problem and turn off the light.

This is a totally unique program that is entirely free to our customers.

But if the problem is so complex that the customer chooses not do it for themselves, well, we can always refer them to one of our commercial customers.

So far the results have been encouraging.

We estimate having done well over a million checks and a significant percentage of the people having this service performed have never been to an AutoZone before.

Sales increases on related parts are up significantly above their already elevated levels from the increased traffic.

Now, turning to our industry trends, just as a reminder, we believe that our industry and our business is neither cyclical nor counter-cyclical more to is it fashion-oriented.

We are, however, impacted by a number of positive macro trends; namely, the number of older vehicles on the road and the miles driven.

The accelerating growth in the population of 7 years and older cars and light trucks which we call our kind of vehicles, or OKVs for short, and the shift in mix to SUVs and light trucks and the first big wave of these vehicles hitting their peak repair cycles is really helping us.

Over the next several years, approximately 5 million light trucks a year will become OKVs.

These are better vehicles for us because they're heavier, they're driven harder, and they tend to be owned by DIYers.

So this is a very positive trend for us.

According to the Federal Highway Administration data, miles driven through June of 2002 were up 1.8 percent over the prior year.

The positive industry trends have contributed to a 5 percent compounded average growth rate for our industry over the past 10 years so the favorable trends of this year are not a new phenomenon.

This has been going on for a very long time.

Lastly, according to our -- according to RL Polk, a record number of vehicles will be coming off warranty within the next three years.

As vehicles come off their warranty, the owners turn increasingly to the DIY after market and ultimately the numbers of OKVs increase.

In summary, our strategic initiatives and favorable industry dynamics have helped us on all fronts and should continue to drive strong revenue growth into the future.

Now turning to commercial sales.

We had commercial comparable store sales of 18 percent this quarter while total commercial sales increased 26 percent as we focused on adding the commercial program into additional stores.

We now have our commercial program in over 2,000 stores supported by our hub stores.

The hub stores provide us with fast replenishment critical merchandise to support both our commercial and our DIY businesses.

Commercial sales for the year total $532 million, a 20 percent increase over the prior year, primarily reflecting the 17 percent increase in commercial comparable store sales.

We continue to have success developing our sales force, developing customers around our existing stores, adding new chain accounts, and implementing new hub stores.

With only 1 percent market share, we believe that we are now the third largest commercial supplier in the United States.

This highly fragmented market is comprised largely of franchisees and Mom & Pop operators so we are the only national company-owned chain serving the commercial market.

While the total after-market and commercial is split -- in total is split between DIY and commercial, about 50/50, AutoZone is about 90 percent DIY and 10 percent commercial.

So we think that we have plenty of room for future growth in the commercial sector.

Our Mexico stores also performed well on the quarter.

We now have 39 stores in Mexico compared with 3,068 stores in the US.

Our commitment is to profitably grow our business in Mexico.

We will continue to subject Mexico to the same 15 percent after-tax internal rate of return hurdle requirements that we have on all of our other investments, but we add a slight premium required for the peso risk.

While it is not capital self-sufficient yet, our Mexican business is profitable and is supporting a significant portion of its own growth at this time.

Now turning to gross margin, our gross margin for the fourth quarter was 45.7 percent, up 1.5 percentage points from the prior quarter and almost 2 full percentage points from the prior year.

Gross margin for the year was had 44.6 percent, up 2.2 percentage points from the prior fiscal year.

As in the past, these gross margin improvements reflect the added impact of new merchandise, our relentless focus on taking costs out of the business, our leveraging of supply chain costs, and the benefit of more strategic and discipline pricing coming from our category management process.

But once again the majority of the improvement in growth is coming from factors other than pricing.

We're very pleased with our SG&A performance for the quarter.

It came in at 28.8 percent of sales, down 1.4 percentage points from last year.

For the entire fiscal year, SG&A was 30.1 percent which was down 1 percentage point from last year.

We are pleased with our progress in controlling expenses, even though we continue to see plenty of room for improvement in coming years.

We had excellent leverage of store level expenses in the year.

The increase in same-store sales helped reduce retail store payroll as a percentage of sales, helped reduce occupancy and regional management costs all as a percentage of sales, of course.

At the store support center, we gained leverage from control in staffing, base salaries and IT spending.

And net advertising costs were actually down even though our advertising region frequency increased dramatically.

This was accomplished primarily through more effective purchase of radio time on a national basis.

An advertising expense net of vendor co-op for the year was only $17.5 million, or .33 percent of sales.

That was actually down on a net basis from the $20.7 million last year.

As noted in the prior year, the company recorded a restructuring and impairment charge in fiscal 2001.

The operating savings from that charge reduced expenses by approximately 5.5 million dollars, or .3 percentage points and once again, nothing was reversed into income.

Finally, the absence of goodwill amortization helped us by about .1 percentage points.

All of this resulted in fourth quarter operating profit of about -- of $312 million, up 40 percent from last year.

Our EBIT margin was up 3.3 percentage points to 16.9 percent.

This is once again the best quarterly EBIT margin performance in our history.

For the year, operating profit was $771 million, up 41.6 percent from last year.

The annual EBIT margin was 14.5 percent, up 3.2 percentage points from last year, and also on a full-year basis the highest in our company's history.

Interest expense for the quarter was $24.7 million, compared with $28.3 million a year ago.

For the year, interest expense was $79.9 million, compared with $100.7 million last year.

These decreases were a result of declining debt and falling short-term interest rates, slightly offset by an additional week in both the quarter and the year.

Rising EBIT and falling debt and interest rates produced major improvement in our financial ratios.

EBITDA-to-interest coverage is 11.1 times this year compared to 6.7 times last year.

Adjusted debt to EBITDAR has improved dramatically to 2.8 times to 2.4 times last year so terrific improvement in all of our ratios.

Our tax rate was 38 percent, down about .9 percentage points in the quarter from prior year and similar to the prior quarters, this was driven primarily by the lack of goodwill amortization.

Net income for the quarter was $178 million, and that was up 49 percent over the prior year.

Earnings per share for the quarter was $1.73.

They were up 62 percent on 102.8 million shares.

Net income for the year was $428.1 million, up 58 percent over fiscal '01.

And finally, earnings per share for the year were $4, up 68 percent on $107 -- on 107.1 million shares.

So we have increased sales organically by 19 percent and doubled EPS in just two years on this business.

Outstanding performance!

Now I'll turn it over to Mike Archbold to take us through the cash flow, the balance sheet and share repurchase.

Mike?

Thanks, Steve.

As Steve mentioned before, our EBITDA for the full year was $889 million, an increase of 32 percent from fiscal 2001 EBITDA of $676 million.

In fiscal 2002, we generated $730 million of cash flow before share repurchases.

We used that cash flow to repurchase 12.6 million shares of stock for $699 million and still managed to pay down debt by $31 million.

That's a record amount of cash flow and an impressive and important achievement.

To put it another way, total cash flow for fiscal 2002 was around $6.81 per share versus the outstanding earnings per share of $4.

This huge cash flow underscores the high quality of AutoZone's earnings.

We have had an important objective over the past few years to improve our return on invested capital.

For fiscal 2002, our goal was to exceed 16 percent.

Our relentless focus on ROIC as a component of economic value-added under scores our belief that has the best indicator of the creation of shareholder value.

And I'm, therefore, pleased to report that AutoZone achieved 19.8 percent return on invested capital for the fiscal year.

These are the highest returns for AutoZone in our reported history and some of the best numbers in all of retail today.

Turning to some of the balance sheet highlights, I'd note that gross inventories are up 10.7 percent from the prior year in line with the 10.5 percent increase in total sales.

In this sector of retail, we need to maintain inventory in parts coverage in order to drive top-line sales.

Inventory growth in line with sales is actually an indicator of health for our sector.

However, inventory net of payables is down 22.6 percent versus last year.

The metric we focus on here is net inventory terms, net of the accounts payable.

On that basis, we improved our net inventory turns based on ending inventory to 13.8 times from 10.2 times last year.

And accounts payable as a percent average inventory increased to 83 percent from 76 percent in the prior year.

Total working capital is a negative $83 million, down $145 million from year -- from a year ago and was a negative 1.6 percent of sales down from a positive 1.3 percent in the prior year.

The achievement of negative working capital is a significant milestone in our management of the business.

Looking at net fixed assets, they were down 2.8 percent versus last year, due largely to our lower capital expenditures.

Cap Ex for the year totaled $117 million, while depreciation and amortization totaled $118 million.

Fiscal 2002 capital expenditures reflect the benefit of a $30 million synthetic lease facility.

As Steve mentioned earlier, we opened 102 stores in fiscal 2002.

This lower-than-historical level was primarily due to the increase in our after-tax internal rate of return hurdle rate to 15 percent last year.

We have seen our new stores performing better, and have actively worked to refill the pipeline.

We expect to increase our store openings to at least 150 stores in fiscal 2003.

Our debt at quarter end was $1,195,000,000.

A decrease of $31 million, or 2.5 percent from the prior year level of $1,225,000,000.

Despite the repurchase of $699 million of our stock during the year.

In sum, we have reduced our balance sheet invested capital by $207 million, or 9.9 percent compared with a year ago.

In the future, we expect to continue to work on improving return on invested capital and maintaining strong financial ratios.

Turning to the share repurchase, our cumulative share repurchases including forward contracts increased to 2.09 billion.

That totals 61.9 million shares at an average price of $33.68.

During the quarter, we increased the buyback authorization by $300 million to 2.3 billion.

And purchased 4.3 million shares at an average cost of $66.13 per share.

We currently have 214 million remaining under the Board Authorization.

We finished the year with $150 million in forward purchase commitments at an average price of $68.82.

Subsequent to year end, the company purchased 1.1 million shares in partial settlement of the forward purchase contract outstanding at August 31 at an average cost of 69.91 per share.

In summary, we've continued to repurchase shares at prices we think are an excellent value.

We've done this using our strong cash flow and it's been accretive to earnings.

Our share repurchase program has played and can continue to play a significant role in managing our capital structure and creating shareholder value.

Turning back to our restructuring reserves, I just want to update you on the status of the restructuring reserve that we took in the fourth quarter of fiscal 2001.

It totaled $92.6 million after tax.

We have had absolutely no turnaround benefit from these reserves in this quarter or fiscal year.

In other words, none of these reserves were reversed into income.

And we recorded no profits from disposing of assets that were written down.

The largest part of the markdowns -- of the writedowns were TruckPro and properties.

As a reminder to those who were updating financial models, prior to the divestiture, TruckPro represented about 3 percent of our sales, 2 percent of our net assets before the writedown, and only 1 percent of our EBIT.

This business as previously disclosed was sold in December of 2001.

We are continuing to dispose of excess properties via sale, sublease or lease termination.

We only have $18 million remaining in the liability reserve primarily representing lease obligations.

Total operating savings from the restructuring impairment charge reduced expenses by about $5.5 million for the quarter, or .3 percentage points.

For the full year, it was $20.6 million, or .4 percentage points.

That basically represents the store expenses and the lease expenses for the closed stores and the savings from contract terminations and severance.

As we stated earlier, all financial comparisons have excluded the charge.

I just want to turn a little bit -- there is been a lot of discussion lately about the accounting for pension expense and stock options among a number of things and I'd like to take a brief moment to discuss each.

First on pensions.

AutoZone has historically recorded pension expense not income.

During 2002, pension expense was $14.4 million, versus $8.6 million in 2001.

Among other things, this reflected a change in our expected long-term rate of return on plant assets to 8.0 percent from 9.5 percent a year ago.

Next I want to touch on stock options.

AutoZone anticipates changing its methodology for the accounting for stock options.

However, rather than making a change now, and another subsequent change, we will await the final rule changes and modify our accounting at that time.

Our total options outstanding represent between 7 and 8 percent of our outstanding shares, and we have historically granted between 1 and 2 percent each year.

So it is not a large number.

Had we reflected stock options as expense in 2002, based on the existing accounting, it would have reduced our operating profit by only $14.5 million, or about 9 cents per share.

Now I'd like to turn it back to Steve.

Thanks, Mike.

Looking at our new store development, we ended the quarter with 3,068 domestic stores in 44 states.

We opened 30 new domestic AutoZone stores in the quarter, or 102 for fiscal 2002.

We replaced three stores in the quarter and 15 year to date.

We finalized the previously planned closure of 14 stores in the quarter for a total of 53 closed stores this year.

Net square footage is up 1.6 percent from last year.

In 2003, we expect to modestly increase our square footage growth percentage to about 5 percent, or 150 stores.

As we focus on finding better sites and as sales and margins improve in our stores, we should be able to find more stores that meet our investment hurdle rate.

We still see an opportunity to open considerably more stores profitably in the US.

While we intend to expand new store openings, it's really important to point out that we're not going to sacrifice our financial discipline to just chase growth.

It's very easy to drive same-store sales by opening up a lot of new stores because with the four-year maturation cycle, they grow same-store sales after Year 1.

We're not going to do it that way.

We remain committed to disciplined expansion that drives ROIC and shareholder value over the long run.

We're committed to maintaining a strong balance sheet and to conservative application of accounting standards and estimates.

We are focusing on creating shareholder value while being responsible stewards of capital.

Now, while we decline to give specific guidance on future sales and earnings, we work very, very hard to ensure that people understand our business model.

Looking forward to fiscal '03, we believe that AutoZone's business is neither cyclical nor counter cyclical and that during normal economic cycles, AutoZone's business should remain relatively stable.

The comparable sales in the four quarters of fiscal 2002 as everybody recalls have been plus 9 percent, then plus 12 percent, then plus 9 percent and now plus 7 percent.

And the sales lift that we have experienced to date has been driven primarily by our advertising merchandising.

So while we're very pleased with the results of fiscal 2002, and have done well even with the increasingly difficult comparisons, those comparisons will obviously continue to get even more difficult.

We believe that we have many initiatives that will help us continue to grow our same-store sales, but we are budgeting very conservatively to ensure we maintain our expense discipline.

We continue to have opportunities to expand gross margin in the coming year, driven by our mix of business, continued supply chain leverage, lower product costs, and possibly improved pricing.

But at the same time, we are dedicated to reducing our expense ratios in the future, -- even as we continue to increase advertising and marketing spending.

Our objective over time to is to get back to the more favorable overhead levels experienced in past years.

The level of interest expense for next year will depend on the level of debt, of course, and short-term interest rates and effective working Capital Management.

However, we are comfortable with the current leverage ratios and expect to target ratios near these levels for the foreseeable future.

We also expect to issue 10-year public debt in the near future.

While this issuance may increase our total interest expense, the opportunity to extend the maturities at historically low long-term rates is very attractive right now.

Repurchasing stock is a key tool in managing our capital structure.

And we can continue to repurchase stock as long as we believe it's accretive.

Again, looking forward to coming years, we're not giving specific earnings guidance because we're not managing the business to a specific target.

We believe that could actually inhibit our performance.

However, you'll notice that our one-year earnings per-share growth rate is 68 percent.

Our five-year earnings per-share growth rate is 26 percent compounded.

And our 10-year compounded annual growth rate for earnings per share is 25 percent.

We have had a great history and we'll work to deliver our best, day in and day out into the future.

As you know, over the last two years, we also have been on the forefront of corporate governance.

We continue to look to do the right thing for our investors every day.

We can confirm at this time that both Mike and I will be certifying our fiscal 2002 results when AutoZone files its 10-K, which is due November 29th of 2002.

We take this certification very seriously, and we're also taking an added step of requiring each one of our 40 top officers to sign similar certifications.

In conclusion, we are very excited about the great year that we have had in 2002 and also about the opportunities awaiting us in fiscal 2003.

We remain committed to doing our best that we possibly can every quarter and every year to build shareholder value over the long term.

Now we'd like to open the call up for questions.

Thank you.

At this time, we are ready to begin the question-and-answer session.

If you would like to ask a question, please press Star 1 on your touch-tone phone.

You will be announced prior to asking your question.

To withdraw your question you may press Star 2.

Once again, if you would like to ask a question, please press Star 1 on your touch-tone phone.

Our first question comes from David Schick.

Please state your company name.

Hi, good morning.

SunTrust Robinson Humphrey.

I have three brief questions about the commercial business.

First, could you talk a little bit about the comps are driven?

Was it national chain or smaller customer accounts?

Second, could you talk about the operating margin trends within the commercial business on a year-over-year basis and your thoughts going forward?

And third, how much of that commercial comp benefit that we saw driving the overall comp do we expect -- or do you expect going into next year?

Thanks.

Uhm, thanks, Dave.

You know, we're very pleased, obviously, with the commercial business.

This is really a terrific opportunity for us.

We have roughly half a billion dollars sales -- in sales in that business now, or only about 10 percent of our business.

The commercial comps in the quarter were 18 percent.

These are the highest commercial comps that we have experienced.

And we ran 17 percent commercial comps in the last -- prior two quarters.

So we're very pleased with the performance and with our plan here.

In terms of how they were driven, you know, they were balanced between the up and down the street business, which is the three-mile radius around our stores, as well as the addition of new chain business.

So we're very pleased by the composition.

The operating margin trends, you know, are consistent with everything we have discussed before, which is, you know, of course, the operating margins in the commercial business are lower than the retail business, but understanding that there is virtually no incremental investment and certainly no capital investment required on this business, because we're leveraging all the inventory out there, we're leveraging all the bricks and mortar and the distribution centers and the stores, well, the incremental ROIC for this business is -- is very, very high and very positive for us.

So this is a strong incremental business for us.

You know, going forward, we hope to continue to grow this business significantly and have it be one of our drivers of growth on the comparable store sales line.

Thanks.

Thank you.

Our next question comes from Bill Simms.

Please state your company name.

Good morning.

Salomon Smith Barney.

Congratulations on an excellent quarter.

Is there another point in AutoZone's history when your average ticket was makes gains as strong as you're seeing today?

And if so, could you describe the environment, the drivers back then and how long it lasted?

Yeah, that's a good question.

And I think, you know, both in our case, both our store traffic and our average ticket are growing.

And I think it's important to, you know, to discuss that because, you know, in a lot of cases, you can grow your average ticket, you know in retail, uhm, if you are consolidating to your lower customer.

In other words, your store traffic drops off and your light customers go away, you can grow ticket.

On the flip side, if you bring in a lot of new customers, you can grow traffic.

But often times, newer customers are lighter buyers and so therefore your ticket goes down.

In this case, you know, we have both going in the right direction and our growth is balanced between the two.

We have seen average ticket gains historically both, you know, in, you know, in all the periods of our history as we have, uhm, developed our product lines in hard parts and -- and, uhm, as we'v added the good, better, best product lines over time.

So I think that you know, growth of -- of average ticket and -- and traffic have, you know, ebbed and flowed over our history but, you know, we're really in our perfect sweet spot in where we'd like to be.

Great, thank you.

Our next question comes from Gary Balter.

Please state your company name.

Credit Suisse First Boston.

One question that has 4 unrelated parts.

The -- you talked about opening up 150 new stores and increasing to 5 percent.

Could you just make us more familiar with the math in that year of opening, what -- is that a cost or is that a benefit right from opening in terms of preopening, et cetera?

Second thing, as we look at the gross margins, are you -- do you worry at all about either Wal-Mart coming in bigger in the sector recognizing the back end of the store that probably they are not going to be big in, but are you watching their pricing versus your pricing?

Are you watching other players in your market?

And I'll make it only three parts.

The third, could you just give us the impact of the extra week, what that did to earnings?

Thank you.

Okay.

Thanks, Gary.

Uhm, the -- the 150 new stores is an acceleration, of course, versus fiscal 2001 and 2002 where we opened 108 and 107 stores respectively.

We're able to do that because following, you know, the adjustment in our hurdle requirement to 15 percent, we now have found more and more sites that meet that hurdle rate.

We're doing a better job of negotiating with the prospective landlords and we have our real estate people focused with their financial hats on rather than just chasing site, on chasing profitable sites.

So we've refilled that pipeline.

You know, our new stores make money, you know, by the end of their first year.

So, you know, as we go forward, we shouldn't see a significant financial difference from that -- that slight acceleration.

Regarding our gross, we watch our gross extremely carefully and we watch pricing extremely carefully.

We want to make sure we're sharp in our pricing every single day.

That's why our strategic category management program which we put in a year ago is so important.

Through that line review process, we -- every day we're reviewing category by category, where we are, you know, relative to the market, what new items we need to put in, what we need to take out of the line, what we need to price those items out and so forth.

So it's a very strategic approach and, you know, we do it obviously watching everybody in the market.

You know, at this point in time, you know, we only overlap with the mass merchants on a very small percentage of our total items.

And, you know, so our focus is on, you know, providing the best variety in the -- and the most complete range of auto parts and so as we watch the pricing, you know, there's two things to think about.

One is that we believe that we've got the best prices and we're the best value in our industry.

Bar none.

And that's, you know, that's something that is very important to us.

The price perception.

But at the same time, we have pricing upside.

And you know, this -- this is a business that did not take -- did not move pricing, you know, even with cost increases over the past many years.

And so as we go forward, we need to make sure that we're right-priced on everything.

But we've also introduced new product lines, and we've introduced, you know, the good range of hard parts as an example, uhm, where we were missing a lot of that coverage down in the low end.

And so pricing is not only the absolute price but also, you know, the good-better-best price ranges.

So as you are doing your price checks out there, you know, you have to make sure that you are comparing the good with the good and so forth.

And Gary, your third question was the impact of what again?

The extra week.

The extra week.

Yeah.

Well, obviously, it's a few percentage points on the sales line with the 53rd week.

And, of course, then the respective financials that flow from that.

So there is a one-time benefit here this year in the 53rd week.

So in terms of modeling, though, how many pennies is that in the quarter?

Well, you know, we're not saying exactly.

We didn't take it down to an EPS level but it's a few percentage points in sales and then of course the profit that flows from that.

Okay.

Thank you very much.

Good luck in the new year.

Thanks, Gary.

Thank you.

Alan Rifkin, you may ask your question.

Please state your company name.

Yes.

Alan Rifkin with Lehman Brothers.

I would add my congratulations as well on a great quarter.

Steve, you spoke about a myriad of things that you think going forward are going to continue to drive your gross margins.

Can you maybe quantify collectively what you think that could enhance your gross margins by over the longer term?

And then secondly, you know, obviously, you know, a significant portion of your success has been the introduction of some of the new product categories.

As you look at the landscape today, what kind of opportunities do you see going forward for new product categories out there?

Okay, thank you, Alan.

You know, we don't actually quantify or project a gross going forward you know because we got to make sure that we're right-priced day in and day out.

And as we go through these category reviews, we are a taking prices up and down.

I think we collectively have moved more prices down in the last year on a SKU basis than we moved up.

So over time, you know, we have to remain sharp and we have to make sure that we have a balance in the pricing between our good, better and best lines.

But having said that, you know, we do think that there is opportunity to move gross upwards in the future but, you know, as we were discussing before, it's important that we keep our eye on that.

We own the price perception in this industry and we're going to continue to do that.

It's very important strategically and we -- you know, we intend to compete very vigorously in the marketplace.

As it relates to new products, you're right that new products have contributed to our sales, and I think, you know, it's important to understand that, you know, the core of our business, our application parts or hard parts, and, uhm, two-thirds of our new products that we have introduced have been in hard parts or application parts.

Those have been new items, they have been increased coverage, they have been some new model coverage as, you know, the later model cars have come on the road.

And also, as I said before, the addition of new segments, particularly the entry level pricing segment.

So, you know, and in the balance of the new items -- and then the balance of the new items have come in things that we have referenced before: neon performance items, truck and SUV accessories that allow people to personalize and customize their vehicles.

So going forward, I expect that we will continue to do that kind of addition.

We think that there's lots of opportunities to continue to expand our coverage and to make sure that we have the right parts and the right store, the right price every single day.

And we're going to continue to innovate and, you know, have items in the stores that are relevant to the younger customers and, you know, and really fun for people to add to their cars.

Then just one more follow-up, if I may, Steve.

When you first came on board, you raise the the threshold for the ROIC from 10 percent to 15.

About what proportion of your store base today are still below that 15 percent threshold?

Well, we raised the IRR requirement on a discounted cash flow basis for all discretionary investment including real estate.

That contributes to ROIC at a higher rate than that because as those, you know, stores mature, and, you know, hopefully we beat that, uhm, you know, it contributes more positively.

So, you know, clearly our business was, you know, before a few years ago, was delivering in excess of 15 percent internal rate of return on all of its original stores.

I think for a few years in there, we were chasing higher levels of growth and we sort of took our eye off of that metric.

And now we're back to it.

So, you know, all the stores that have been opened in the past year have -- have had the better metric and -- and in virtually, uhm -- in most of our stores in our history, uhm, you know, going back to our founding, have had that metric, which is what has contributed to an almost 20 percent ROIC.

You know, you -- we couldn't have done that but, you know, the prodominance of our store base contributing at that level.

Okay.

Thank you.

Thank you.

We have a question from Matthew Fassler.

Please state your company name.

Goldman Sachs.

Good morning.

Good morning, Matt.

A couple of questions if I may.

First of all, taking a look at gross margin, you know, clearly a stellar performance year to year and sequentially and, in fact, the sequential increase was the largest we have seen in some time.

I'm wondering whether there were isolated factors related to the time of year, seasonality or what not that would suggest that the gross margin -- this level of gross margin probably should not be a base going forward or whether you actually this that, you know, the 45 percent-plus level or the high 45s as we think about modeling out next year would be the right starting point.

Yeah.

Matt, that's an excellent question because there -- you know, you remember, there is seasonality to our business, and so this is typically the -- the fourth quarter is our highest seasonal quarter, you know, and if you indexed it, it would flow right around, what, 75 to 125 percent on the index.

But so, you know, it's not as seasonal as a lot of retail businesses but this is our highest seasonal quarter and it's our best gross margin quarter so you can't straight-line the growth off of the fourth quarter number.

You have to look at the relative numbers in each quarter and, of course, the annual number going forward.

So I think that's an excellent point.

Just to ask you another question on that from time to time, companies that have underaccrued rebates earlier in the year find that they have to true up their P&L at the end of the year basically to get all those rebates recognized given that when the year ends up being as strong as it first appeared.

Was that a factor at all in driving the fourth quarter gross?

No.

Once again the gross was driven by business result and it was driven by the mix, it was driven by, you know, the cost savings that we have driven in our supply chain as we become more efficient.

It's been driven by cost of goods negotiations through our category management process and, of course, a little bit through pricing but no, it's been through operating factors --

Gotcha.

-- that impacted our gross.

Gotcha.

That's very helpful.

Second question, on the mix, if you could speak both to the quarter and more broadly in a little more detail about the mixed drivers that you see and whether we are talking about hard parts growth, whether it's a private label versus branded mix, you know, any insight you can give us as to how the mix is evolving and the way that's clearly helping your financials?

Well, I think, you know, if you look at the seasonality -- of the mix, you get a slightly better mix of goods in this quarter because it's a higher hard parts mix.

You typically high heat contributes to failure in hard parts and there is a better mix there.

In the winter months where you're selling a lot of windshield washer fluid and antifreeze and those kinds of things, those commodity type items tend to be a little lower mix.

We have a good balance of gross across our store.

If you set aside those kind of commodity kind of items, the relative margin between the application parts and behind the counter parts and sales floor items are pretty comparable so the thing that really drives it is the seasonality of those commodity items.

Gotcha. and my final question, the commercial business obviously has a whole lot of drivers.

One of the things I get you had contemplated was a greater role for an outbound sales force in addition to the growth of stores in the business and increased emphasis on commercial overall.

Is that turning out to be a driver of the business, and would you expect it to be so going forward?

Well, you know, the commercial sales force is brand-new for us.

We just created an outbound selling force that goes out and prospects.

We put them on the street for the first time at the end of last quarter and we ramped up a little bit more in this quarter so we're not -- you know, in these results we just have begun to see some of the results of our greater selling efforts.

So we think that there's -- there is, uhm, going to be, you know, greater fruit borne from our efforts in using that sales force as well as adding, you know, more branded items which we have added in the inventory this quarter in order to cover our commercial business.

Gotcha.

That's very helpful.

Thank you.

Thanks, Matt.

Thank you.

Our next question comes from John Lawrence.

Please state your company name.

Yes.

Morgan Keegan.

Good morning, guys.

Good morning, John.

Would you comment a little bit when you talk about the tides of advertising campaigns that "get in the zone" store has legs, you just started engine diagnostic.

First of all, what's different about "get in the zone" at this point than it was a year ago and can you describe that lagging effect a little bit?

Yeah.

You know, it's not the slogan "get in the zone" or, you know, the creative that's driving the business.

It's the message.

And with $60 billion worth of undone maintenance out there, we can double the size of this industry as you know if we could simply remind people to do the maintenance that's required on their cars.

So the result on consumer behavior from the advertising campaign is that reminder that they need to do something on their cars.

And so I -- it's more of a cumulative effect over time and the consistency of the message.

We have focused this past year on radio.

We increased that focus more recently.

We have an opportunity to spend more in radio and drive even higher levels of frequency.

And we continue to rotate seasonally appropriate messages as well as messages for our new products.

All of that has proven very successful in reminding people to do the maintenance that's required on their cars.

So, you know, I truly believe, John, that there is $60 billion worth of upside.

And, you know, "get in the zone" is just the avenue that we are using to remind people to get there.

So I think, you know, we've got legs to go on this thing for many years.

And to follow that, on engine diagnostic, from where you started to today from an execution standpoint, what are you -- where do you think you are on the scale?

Well, you know, uhm, you know, the bigger thing is the services and the advice, the trustworthy advice that we offer in our stores, and, you know, "check engine light" is just one component of that.

We've got Loan a Tool.

We do starting and charging diagnostic services and so forth.

And, you know, we can continue to offer that kind of advice and expand that over time.

And I think AutoZone is becoming more and more recognized by our customers out there as the place to go when you need advice.

You know, by definition, our customers at the retail level are DIYers, they're not experts and so therefore our expertise in the stores really differentiates us from other channels and our competitors and we are becoming more and more known there.

So check engine light is really one element of a broader opportunity here.

Right.

Thanks.

Congratulations.

Thanks, John.

Thank you.

Doug [Naverra] you may ask your question and please state your company name.

Yes, good morning.

Merrill Lynch.

Steve, just one question on SG&A.

You had mentioned you're trying to get back to historical corporate overhead levels.

Obviously, you've made a lot of progress on that front.

How much more do you think you have to go there and how long do you think that will take?

And secondly, if you could just address how you're currently marketing the engine diagnostic services to the customer in your store?

Thank you.

Doug, give me that last part again?

Oh, uhm, can you talk about how you're marketing the engine diagnostic services to the customer in your store?

They may not be aware that you're offering it.

Right.

Thanks.

On the SG&A, if you look at SG&A as a percentage of sales, in our history, we have hit historical lows on a percentage of sales that's closer to 28 percent than the 30.1 percent that we've achieved in this fiscal year.

So, you know, our goals are to get -- to at least get back to those kind of levels so we think that over time, we can do that and drive the ratios down and, you know, again, once again, because this is not an industry that is wholly price-driven like other sectors of retail, we can take those savings and pass them on to our shareholders and continue to build shareholder value.

Regarding the engine diagnostics, we're marketing that, you know, as we just discussed with John Lawrence, we're marketing that through our advertising campaign out there to inform people of the services that we offer.

We do a little bit of print and then, of course, our in-store signage is critically important.

We have about 6 million people per week that come through our stores.

And that's a tremendous amount of foot traffic.

And so we've improved the signage and the communication in the stores and, you know, certainly as our customers come in and watch the AutoZoners go out to people's cars and help give advice on various things that they become aware, as well.

So all of that has been very successful in driving the awareness of our services.

Okay.

Great, thank you.

And good luck in the next year.

Thank you.

Our next question comes from [Venae] Shaw.

Please state your company name.

Morgan Stanley.

Couple of questions.

Steve, could you give a few examples of different categories that you think if you were to change the mix, where you might see some positive impact next year just to the -- biggest opportunities?

And then second, can you talk about if the economy were to weaken, just some parts of the business that you think conceptually could get, you know, could get hit potentially?

And then finally, can you just talk about any changes in the inventory mix you guys are going through right now as you kind of gear up for the shift to more trucks and SUVs?

Thanks.

Sure.

You know, some -- let's start with the economy.

You know, we believe that we're neither cyclical nor counter cyclical and the way that shows up is as it relates to, you know, the after market is, uhm, if people are holding on to their cars longer because it's a weak economy, then, well, they tend to put more money into those cars.

But even in a weak economy what we've seen with the financing on new vehicles, is that there's more and more new vehicles being sold.

And as that happens, that's good for our business, as well, because it puts more vehicles on the road.

You know, if you go out today and you buy a brand-new vehicle, you don't take that '95 Taurus and drive it to the dump.

You put it back on the road either as a trade-in or sale or what's increasingly happened is you see more and more baby boomers handing these -- these, uhm, older vehicles off to their teenage kids, and so therefore, there are more vehicles per household; there are higher numbers of vehicles on the road; there are more miles being driven, and us that as a trend.

And that's predicted to go forward into the future.

So the economy, therefore, doesn't seem to drive it as much.

You know, a car is a need to get to a job or, you know, to engage in everyday life and so, our business doesn't seem to be rocked by the economy.

In fact, it seems to be helped on both ends, frankly.

And so therefore, the drivers our business are more what we do to go capture that $60 billion worth of incremental maintenance over time.

Some of the category mix opportunities you know, once again, our grosses are pretty good and pretty similar across the hard parts and application parts as well as on the sales floor.

So, you know, where we have worked is in the commodity areas.

And you know, to take oil, for example, we don't football the price of oil and therefore drive our margins down what we have worked on is increase at awareness of the efficacy of the synthetic oils and the synthetic blends where the margins are higher.

So we go for breadth of variety to make sure that we possible oil that people could want in stock and that's been a very successful selling point for us.

So people come in for our variety.

They pick up oil when they're buying their hard parts and their filters and, you know, doing the complete job.

That's not something you can do in other channels.

So we think that that's a stronger position for us to be in.

Related to some of the inventory mix, you know, clearly, over time, you know, as SUVs and light trucks become a bigger and bigger portion of the auto -- and light truck -- light vehicle mix, I should say, then clearly we have an opportunity to provide more and more parts as well as accessories for those kinds of vehicles.

You know, historically that's not been our focus.

I think we've gotten a little bit better at it but we have a lot of opportunity left.

We have a long way to go there.

Those vehicles are great vehicles for us, they are highly customized.

As they're passed on to the second owner they get even more customized and driven harder.

They're kept longer and so forth.

So that's really a great trend for us going forward in the future and we'll focus on that.

Great, thanks.

Brett Jordan you may ask your question and please state your company name.

Advest.

A couple of quick questions.

One of them has been asked in the mix already but on the DIY side, all things being equal adjusting for the season and the relatively hot summer that we have had, have you seen any shift towards hard parts from the accessories or performance and appearance parts with the softening economy?

Or is the business on adjusted basis really comparable with the last year?

Well, you know, the weather is really not a big driver AutoZone's business.

There's good weather and bad weather, all over the country.

And you know, remember, we have 3,068 stores right across 44 states and then more in Mexico.

So you know, we see hot weather in some areas, cool weather in others.

Really, over the course of a quarter and a year in the long run, across the country across our stores, it all sort of averages out.

So so the weather this summer did not have any material impact.

I guess the question I'm asking about, are you seeing any mix between discretionary and non-discretionary product sales?

Because it doesn't have any impact, no, we're not seeing any mix in the -- you know, there really isn't.

Basically, Brett, you know, what we do in the marketplace, how we market, how we merchandise, what we're focusing on is really what drives our business.

You know, in any given week, weather can have that kind of a mixed impact but over the course of a quarter and a year it just washes out.

So that's why we focus in our message and focus on our business model on, you know, making sure that people understand that it's what we're doing and it's that $60 billion.

So it's not the economy that's driving our business.

Okay.

Within the commercial market, I mean, clearly an 18 percent comp pretty solid.

Relative to certainly some of the other people in the industry earlier this week.

Are you seeing -- I guess if you could break that out between what you see in growth in the DIFM in general versus market share gains contributing to that percent?

Over the last 10 years, first of all, in the DIY retail side over the last 10 years, this industry has grown at a 5 percent compounded rate.

It's gone up every, single year.

This is one of the greatest growth industries going out there.

But on the commercial side, the compounded average growth rate is similar to about 5 to 6 percent so you have two dynamic growing industries, the commercial, after market, as well as the DIY after market.

So both of them are growing and both growing over the very long run.

They are projected to continue to grow over the thy course of the coming year so this is really an exciting market.

And I think it's important that people understand that because you look at other areas of the economy or other areas of consumer and the fundamental growth rates are driven by the population growth levels which are flat to up one percent.

Here we have had a business that's grown at 5 to 6 percent on both sides for the very long run and that's what makes us so excited about this industry and that's what makes us so excited about the opportunities that we have to market our business and develop our business going forward.

So you haven't seen any recent shift away from the service side of the business as people might not be inclined to spend the labor dollar?

We have seen growth on both sides of the business in good economies and bad economies.

And you know, clearly we have picked up market share in the commercial side as we developed our business model over the past year, but we have seen growth as well in the fundamental industry.

Okay.

And then one last question on the inventory per store.

Do you see that continuing to grow in line with sales growth or is there a point where you begin to leverage the working capital turns on an average store inventory level?

Well, you know, in our industry, inventory is critically important.

You've got to have the coverage of, you know, year, make, model, specific parts. 80 percent of the items in our stores have one item per SKU in the store.

Meaning that there's one part that's specific.

So when you see people start cutting inventory, in this industry, you are seeing them cut SKU in application parts which will in turn impact sales.

We have increased our inventory commensurate with sales over the past year in order to make sure that we have better in-stock conditions, number one.

Number two, that we're reacting to the newer vehicles on the road and number three, we have added branded parts in the commercial area.

So you know, going forward, we certainly don't intend to expand inventory beyond our sales level and you could see some modest leveraging of that going forward in the future as, you know, some of this inventory ramp-up has been through the addition of branded items.

But the most important metric that we believe in is the net inventory number, and you've seen our net inventory number in our net -- drop in our net inventory turns increase significantly over the past year from 10.2 times to 13.8 times and that's due to the great work that we're doing on the payables ratio side.

So, you know, we're very pleased with our inventory situation.

And one last question quickly.

As far as regional expansion, do you have any markets that you're focusing as you accelerate the physical growth again?

Well, if you look at the map, we're in 44 states.

You know, clearly, you know, we need to be filling in markets all over the country and -- and really that's what we're doing.

We have opportunities -- even in our most developed market we have opportunities for fill-in stores.

So there is just a tremendous amount of growth potential and fill-in potential.

We can build stores profitably well into the future.

Thank you.

Thank you, Brett.

I think with that, we are going to run out of time here.

So I want to take an opportunity to thank everyone for joining us on the conference call.

And we will be presenting just so everyone knows it at the upcoming Robertson Humphrey SunTrust conference.

We look forward to seeing you there.

Thanks for participating and we'll speak to you soon.

Thank you.

This concludes today's conference call.