汽車地帶 (AZO) 2003 Q1 法說會逐字稿

This conference call is a live broadcast of the annual meeting as well as a discussion of AutoZone 2003 financial results.

Steve Odland the Chairman and CEO will be making a short presentation on the highlights of the quarter as well as last fiscal year.

At any time during the conference if you need assistance, press star 0.

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 subjects to risks and 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 differ materially from actual results.

These refer to the risk factors on the form 10-K.

AutoZone makes no obligation to update the forward-looking statements to reflects the occurrence of unanticipated events.

Good morning to everyone.

Thank you for coming to New York or if you're coming into the city this early in the morning.

I'm Steve Odland, the Chairman and CEO of AutoZone.

Welcome to the 2002 annual meeting.

Of course, it really wouldn't be an official AutoZone meeting unless we charted with a cheer.

The cheer is something that is part of AutoZone's culture and has been since our founding.

We thought we would share it with you this morning.

We will have some leaders of the AutoZone cheer.

Culture is a very important part of who we are and this is a sample of a practice that we have with all of our AutoZoners before every large meeting.

First of all I would like to welcome Mike Broderick up.

Mike is the Vice-President of the Stores in the Northeast Division here.

I will share with you what the cheer is all about.

We'll do a dry run.

If I can ask everybody to stand up.

Here is what we are going to do.

The way the cheer starts starts.

We will spell AutoZone out.

If you remember the old YMCA song, we are going to spell it out phonetically.

It will go like this.

Mike is going to say give me an A and everyone will go, and make an A. He will say give me a U. Give me a U, there you go.

Like a touch down, right.

Then it's a T and an O and then a Z. This is the good one. (laughter) And another O and then an N. I think you have to stand side ways for the N. There, they can see the N. The E. This is another fun one.

Get the foot into it.

He will then say “Who is the best?” and then everybody is going to say, “It's AutoZone.” And then he’s going to say “Who is number one?” and of course it is the customer.

And then we’re going to say -- all together we will say “AutoZoners will always put customers first.

We know our parts and products.

Our stores look great We have the best merchandise at the right price.

That's the way this thing goes.

It's early in the morning morning.

It has to be a big start to this meeting.

We have to bring down the roof on this thing.

Mike, hit it (Clapping)

A-U-T-O-Z-O N E. Who is the best?

Autozone.

Who is number one?

The Customer.

AutoZoners will always put customers first.

We know our parts and products.

Our stores look great.

We have the best merchandise at the right price. (applause)

I'm just trying to fathom how that will show up in the analysts' reports tomorrow.

Thank you, everybody.

We have a number of people here today who have joined us.

Including our stock analysts from around the country.

We have our board of directors, our management team.

I would like to introduce a few people to you first.

First, I would like to start with our board of directors.

If everybody could rise as I mention you.

Charles Nelson, who is the Edgar S Willard, Jr.

Professor of Corporate Governance at the University of Delaware and chairman of our nominating and corporate governance committee.

Charles has been a director since the year 2000.

Dr. Jerry House, the president and CEO of the institute for Student Achievement in Lake Success, New York.

Jerry has been on the board since 1996.

Pitt Hyde, who is currently the President of PittCO and Chairman of GTX. a biotechnology company.

Most of you know Pitt as the founder of our company going way back and Pitt, did you invent the cheer?

Of course! (Laughter)

We'll give Pitt credit for that.

Jim Keegan an who is the Chairman of Adams Keegan and Chairman of our audit committee.

Jim is the former Chairman of National Association of Security Dealers, former Chairman of NASDAQ and cofounder of Morgan Keegan.

He has been on the board since we went public in 1991.

Eddie Lampert is the CEO of ESL Investments, a private investment firm and Chairman of our compensation committee.

He has been on the board since 1999.

Andy McKenna is a retired Home Depot executive.

He held strategic positions in business development, operations and information systems.

Andy has been a director since the year 2000.

Marsha Evans, who was elected President and CEO of the American Red Cross this summer here in New York.

Prior to that she was National Executive Director of the Girl Scouts of the USA.

At her retirement from the U.S.

Navy in 1998 she was the Rear Admiral and Superintendent of the naval post-graduate school in Monterey, California.

Marty joined the board in January and is up for election by the stockholders.

Earl Graves, Jr.

Butch is the President and COO of Earl Graves Publishing, which is the publisher of Black Enterprise magazine.

Butch joined our board in February as well.

Welcome, Butch.

We are thrilled to have Marty and Butch on our board and appreciate the expertise that they have brought to us in this past year.

Mike Michaelson, a member of the general partners of Culvert, Kravis and Roberts is not here with us today.

Mike is not standing four re-election to the board at this time, but I would like to thank Mike for all his years of service to AutoZone.

He has been on the board of directors since the company incorporated in 1986.

He was instrumental in helping to shape AutoZone into the premiere company that it is today.

Now I would like to introduce members of the senior management team or what we call our executive committee.

First, Mike Archbold who is our Senior Vice-President and Chief Financial Officer.

Next, Bruce Clark, our Senior Vice-President and Chief Information Officer.

Brett Easley, Senior Vice-President and Chief Merchant.

Harry Goldsmith, Senior Vice-President and General Counsel and Secretary of the Board.

Lisa Kranc, Senior Vice-President of Marketing.

Mike Longo, Senior Vice-President of Store Operations, A Z commercial and all data.

Bon Olsen, Senior Vice-President of Mexico and US Store Development.

Bill Rhodes, Senior Vice-President of Supply Chain and IT.

And finally, Daisy Vanderlinde, Senior Vice-President of Human Resources and Loss Prevention.

I would like to introduce to you John Rueco, a representative from Equiserve, our transfer agent, who has been sworn as the Inspector of Elections and will tally the votes for us today.

Now, Mr. Goldsmith, will give a report of the notice of the meeting and presence of a quorum.

The meeting is called to order and I am presenting to the meeting the complete list of the holders of the record of the company's common stock on October 15, 2002, who are entitled to vote at this meeting.

The list includes a number of shares held by each shareholders.

It was prepared and certified by Equiserve,the company’s transfer agent for its common stock.

I’ve also received an affidavit of Equiserve stating that on or about November 4, 2002, the notice of meeting, the proxy and postage pre-paid return envelope were mailed to stockholders of record as of its close of business, December 15, 2002.

The tabulation of the proxies received from stockholder indicates that more than a majority of the outstanding shares are represented at this meeting and a quorum is present.

Thank you, Harry.

Before we proceed to the first order of business, if the proxies have not been filed or if there are any stockholders who will be voting in person who have not registered, please file the proxies and register with Mr. Gold Smith at this time.

If you have not voted your proxy or would like to vote by ballot, please raise your hand and a representative will distribute the ballot to you.

In accordance with the notice of the meeting, the first order of business is the election of the directors to serve until our next annual meeting.

I will now ask for nomination of the slate of directors as listed in the proxy statement and sent to all stockholders.

Mr. Chairman I nominate Charles M. Nelson, Marsha J. Evans, Earl G. Graves, Jr. and Jerry House, J.R.

Hyde, III, James F. Keegan, Edward S. Lambert, W. Andrew McKenna, and Steve Odland.

Thank you.

Is there a second?

Thank you very much.

We have not been notified of any other nominations.

Therefore I declare the nominations closed.

If somebody is voting in person, now please mark your ballot, we will collect them and announce the results later in the meeting.

Next order of business, approval of the directors stock option plan.

I ask for a motion on this matter.

Mr. Chairman, I move that the stockholders approve the adoption of the 2003 directors stock option plan.

Thank you.

Is there a second?

Thank you very much.

The motion to approve the directors stock option plan has been moved and seconded.

Is there any discussion?

You are voting in person, please mark your ballot.

The next order of business is the approval of the director compensation plan.

I ask for a motion on this matter, please.

Yes? [inaudible] (Laughter)

Thank you very much.

Is there a second?

Thank you.

The motion to approve the director compensation plan has been moved and seconded.

Is there any discussion?

If you are voting in person, please mark your ballot.

Last item of business, the ratification of the appointment of Ernst and Young LLP as the independent auditors for the company for the fiscal year ending August 30, 2003.

Ernst and Young has been selected by the audit committee as the independent auditors for the company.

They are an independent firm of certified public accountants and they state that at this time they have not had any material financial interest or any connection to the company or its subsidiaries or its predecessor other than as its auditors.

Chris Fayne is with us today representing Ernst and Young.

If you will please stand up?

Thank you very much.

I will now ask for a motion on this matter.

Mr. Chairman, I move that the appointment by the company's audit committee of Ernst and Young LLP as the independent auditors for fiscal year ending August 30, 2003 be hereby ratified and approved.

Thank you.

Is there a second?

Thanks very much.

The motion to approve the ratification of the appointment of Ernst and Young LLP as independent auditors has been moved and seconded.

Is there any discussion?

[audio gap]

-- investors and in the aggregate they own 350,000+ shares of AutoZone.

By the way they all say thank you for the stock price appreciation in your tenure.

We are however, concerned about the ratios of the fees that are paid to the auditors for other services services compared to audit services.

When the SEC first started requiring disclosures of audit fees, the Wall Street Journal, the Investor Responsibility Center and my own firm all did studies to see what did the ratio look like?

On the average it was three to one, other to the audit fees.

This immediately raised concerns about conflicts of interests.

How objective is an auditor being if they are paid three times more for the other services.

It was sort of borne out later by the accounting scandals, I don’t need to discuss here.

Some of my clients actually even started filing shareholder proposals asking that auditors only do audit work, not other work.

If a three to one ratio caused that sort of ruckus, you can imagine what they thought when they looked at this proxy statement which is like a ten to one ratio.

Page 11, you know, it's $1,193,668.

For other work, $142,248, I’m sorry $142,258 for the audit work.

Mr. Chairman, I'm well aware this ratio can continue in the future under Sarbanes-Oxley because it's for tax services mainly.

I will be very blunt.

My clients don't care if Ernst and Young is being paid a million dollars for tax services, or for taking out the garbage or for shredding papers like Arthur Anderson did at Enron.

They get nervous when they see that type of ratio.

My question to you is, is this ratio going to continue in the future?

Thank you for your question and your comments.

I think it's very appropriate in this day and age and the discussion on directors fees has been something which our audit committee has taken under consideration.

By the way, Ernst and Young would probably argue that the base fees are too low in this matter, therefore skewing the ratio.

But I would say to you that there are multiple components to our auditors fees, including fees for the base audit itself.

Ernst and Young also has provided tax services to us, as well as interpretations of the state tax laws and so forth forth.

As you know, this is an area that is evolving significantly and has evolved just in the latter part of our fiscal year here.

I think that you will see in the future a different balance in terms of the fees as independent auditors are required.

And as the rules become clear.

The rules, as you know, have not been finalized by any of the government agencies in the stock exchange and so forth.

As the rules become clear, I'm certain that we will understand exactly what the independent auditors can and cannot do as it relates to other services other than the audit fees.

It is our own policy to limit our independent auditors to the audit itself, as well as to the tax services.

Should that change in the future we of course will comply with that.

Okay, thank you very much.

Mr. Chairman, just as a point of clarification, when looking at the proxy, the fees paid to Ernst and Young, just for clarification, for the audit service was actually $327,500.

The 142,000 that you referred to is actually the audit related fees which is other fees.

We actually broke it out into the multiple pieces, as a point of clarification.

Thank you, Mike.

If you are voting in person, please mark your ballot.

The polls are open.

Please pass your ballots to the center aisle for collection.

I ask that the ballots be collected at this time.

During the tallying of the proxyies, we will share with you a little bit about the industry and a little bit of what we accomplished in our fiscal 2002.

The results for the first quarter of 2003 will follow that.

We just announced our first quarter 2003 results this morning.

And then we will talk also about some things which we are very excited about for the remainder of our fiscal 2003.

Before we begin, Harry?

Before we begin, we need to let you know that some of the statements made in this presentation are forward-looking statements.

Please read the slide on the screen that describes the risk of some of these forward-looking statements.

For more information on the risks, refer to the risk section of AutoZone’s 10-K for the ending August 31, 2002.

Look at the slide right here.

Thank you, Harry.

I would like to proceed and tell you a little bit about our industry.

I'll tell you a little bit about what we have done over the course of fiscal 2002.

This is a celebration of a terrific 2002 fiscal year.

First of all, as most of you know, AutoZone is the number one auto parts and accessories retailer with annual sales of $5.3b in the fiscal year.

We now have 3,098 stores open in 44 states and 40 stores open in Mexico as of today.

We were founded, as you know, in 1979, listed on the New York Stock Exchange under the symbol AZO in 1991.

We have been an S & P component since 1996.

This map depicts the areas of the country in which we have store representation.

You can see in the red shaded area, these numbers, the states where we have store representation.

We also have highlighted the northern states of Mexico where we do have our 40 stores, largely along the border with the United States.

We sell automotive maintenance and repair parts and accessories.

We focus on two major target groups, the retail or do it yourself segment and the commercial customer, which is, who are the professional technicians or the garages into which we deliver parts.

All of our stores are company-owned and operated.

We have no franchisees.

And the stores across the country are largely owned, the real estate is largely owned by AutoZone AutoZone.

Average size is 6,400 square feet and we stock 22,000 SKUs with over 100,000 SKUs available throughout our distribution centers and our hub stores.

We do not provide service.

So we don't have service bays per se but we provide many services that are free to our customers.

We have over 44,000 employees who we all AutoZoners.

Many of which, house of whom are A S E certified parts pros.

And this is an important part of our company.

By definition, our customers are DIY or do it yourselfers, so by definition they are not experts at fixing and maintenance of their cars.

So our people are highly trained as experts in understanding parts and the ability to help our customers diagnose and solve their problems.

And so we go out to the car in the parking lot.

We provide many in-store and curb side diagnostic services like our check engine light program that I'll talk about in a little bit.

We will loan tools to people for free if they don't have a specialty tool that is necessary.

We will charge battery batteries for free and install batteries.

We do oil re recycling and electrical systems diagnostics.

Many services that we add.

That's part of what differentiates us and makes us stand apart from many of our competitors and the mass merchants who simply don't offer these types of services.

Our vision for the company is to create the most exciting zone for vehicle solutions.

That's an important part of what retailing is about.

We want to keep our stores fresh and exciting at all times.

Therefore you will see things change continuously in the store, including the merchandise in the stores and how it is presented, what the stores look like at any one given time.

We have three growth priorities for the company.

First of all, U.S. retail is the number one growth opportunity.

Number two is A Z commercial.

Number three is our Mexican retail businesses.

I would like to talk a little bit about each one.

As you can see, in this chart, our sales break out roughly 90% in the U.S. retail business.

That's the chart that is shaded in red.

The commercial business is depicted in blue with 10%.

You can see the small sliver here that we have in Mexico today.

So let's begin with the resale retail or the DIY industry.

The industry size is $36b in the U.S.

All the numbers that we quote are from the Automotive After-mart Industry Association, our lead industry association.

This has been a very vibrant and growing industry over the very long period of time.

This industry has grown compounded at 4.5% every year over the course of that period of time and never had a down year.

When you think about this as a consumer industry as it relates to almost any other consumer kind of retailing operation or manufacturing operation, this clearly is exceptional growth over the very long run.

AutoZone's DIY or retail sales were 4.6b in fiscal 2002 and we hold the number one share position with only a 12% market share.

I think that's important because if you take the top four or five chains together, in total they only add up to about 35% to 40% of the entire industry.

So this still is a very fragmented business with lots of mom and pop retailers out there.

This chart depicts the constancy of our growth over the last ten years at the 4.5%.

You can see, we talk about our business as being a-cyclical.

We really are not subject to the cycles you see with other retailers or other auto parts manufacturers that supply us.

So as an auto parts retailer you can see over the course of time our industry has not been affected dramatically by the various parts of the economy.

This is AutoZone's market share growth.

You can see we've added to the market share growth every single year since we have been in existence and over the past year we have added about 50 basis points to our market share.

The interesting phenomenon as a retailer in the industry has been through the, probably the mid-nineties we saw a rapid progression of square footage expansion.

But we have seen a rationalization most recently with the number of stores down by 5% in the industry over the last several years, which has contributed to the increase in the productivity of the stores that have remained in the industry, including AutoZone stores.

From an industry standpoint there are a couple of things which really drive, were not economically driven but were macro factors driving our business.

One is the number of miles driven in the United States.

You can see since 1979, all the way up to fiscal 2001 the tremendous increase in the number of miles driven annually by U.S. drivers.

So it has been a constancy of growth.

The more miles driven, of course, the more wear and tear put on automobiles and light trucks.

Therefore, the more amount of maintenance that needs to be done on those vehicles.

That's a huge opportunity for us.

Also we have seen over the past half dozen years the percentage of households in the United States that are engaged in DIY has increased over time.

So there has been a notion out there, maybe the computers and the sophistication of cars that has happened over the past 20 years, you know, might in fact contribute to people not knowing how to fix their cars.

But in fact the statistics show just the opposite.

More households are engaged in DIY than ever before.

One of the most poignant studies done by our association said that if you look at all the maintenance being done on automobiles and light trucks today versus what could be done if people followed the regimen set out in their owners' manual, in fact there is a $60b annual gap between what is being done and what could be done.

That is a significant number because it says that we can virtually double the size of our industry on top of that 4.5% long-term compounded average growth rate if we can successfully remind people to do the maintenance that is required on their cars.

I think you'll see in a little bit, and you probably heard and you can't have lived in America without having heard the “Get in the zone” campaign over the past year and a half.

That's the reason for the campaign and it has been successful in reminding people to do the maintenance on their cars.

The second very large and important macro factor in driving our industry growth are the increasing number of older vehicles.

We define older vehicles in this case as seven year old and older vehicles.

We called them our kind of vehicles or OKVs for short.

You can see over the period of time, the total number of vehicles on the road in the United States have grown significantly.

But the bottom shaded bars are the number of OKVs or older vehicles on the road.

Remember, OKVs are important.

Not only do they have the maintenance requirements from the miles driven, but they also are entering the heavy repair cycle.

After about seven years on the road, you get the parts failures and the heavy need for repairs on automobiles.

So that's why they enter our sweet spot, why we call them OKVs.

Over this period of time you can see that the number of OKVs have increased significantly.

The important point in this is back in 1979, OKVs only accounted for about a third of all the vehicles on the road.

So as a predominance of the vehicles on the road 20 years ago were newer vehicles.

Whereas today the number of OKVs is about half of all the vehicles on the road.

Not only are there more vehicles on the road, but those vehicles are older.

We have heard for a very long time that cars are made better and lasting longer.

There was a question at some point how that would impact our industry.

The answer is that it impacted us very positively.

As the vehicles stay on the road longer, they stay on the sweet spot longer and in the repair cycle longer.

So it’s a very important thing for our industry and for AutoZone.

The other factor, the more recent factor, are the aging of the SUVs.

The SUV boom happened in the past ten years.

I talked about OKVs being seven years old and older.

The average age of the SUV fleet in the United States today is only about five and a half years old.

The vast majority are newer vehicles.

They haven't even hit our sweet spot yet and become OKVs on average.

Those vehicles are better vehicles for us.

They tend to be driven harder.

There are data out there to suggest that maintaining those vehicles are more expensive and so forth.

We have this big boom still coming through the pipeline and should affect us positively in the years to come.

Roughly the macro factors of the miles driven and the number of OKVs out there roughly drive our business.

Our same store sales correlate generally to that.

The green line here is a percentage change in the OKV growth right over the very long period of time.

You can see we have been in a sustained declining growth rate of OKVs until the year 2000.

Now we are poised for a multi-year up tick in the number of OKVs.

All we are doing is lagging new car production by three years.

These are good numbers.

The red line is AutoZone's same store sales numbers.

You can see we roughly track that.

One large departure from the trend has been fiscal 2002, which has been driven largely by our advertising and our merchandising efforts.

I will talk more about that in a moment.

AutoZone really stands out as a different kind of auto parts retailer in America.

We are the only national brand out there.

Anyone who is familiar with consumer products knows the importance of brand name.

We drive demands in the marketplace through innovations in merchandising and category management and advertising.

We are known as the most trustworthy place for people to go for advice.

All the services I mentioned before that we offer with highly trained AutoZoners adds to the trustworthy notion with our customers.

An important part of our growth over the past year has been driven by the advertising and merchandising.

It has been a terrific balance in our growth between the amount of foot traffic that we are driving in our stores as well as the average transaction size.

Those are really the two components of volume.

We have been very fortunate in the past year that our advertising has done a terrific job of increasing the number of transactions and the amount of store traffic that we are experiencing, and our merchandising in the stores and the new merchandise that we have added and the creativity of the merchandising has contributed to building the average ticket size.

We have both metrics going in the positive direction and roughly balanced.

It's a very positive story.

Now, going back to the $60b opportunities.

When we saw this a few years ago we said this is a tremendous thing.

And our studies showed the people weren't remembering to do the maintenance on their cars.

Everybody is busy and has other things to do.

Car is transportation.

We launched the “Get in the Zone” advertising campaign.

The theme of the campaign is to promote car maintenance in order to provide a more safe vehicle experience for the drivers and their families and the occupants of the vehicle, as well as promote car longevity.

For most households, the automobile is either the number one or second largest asset in the household.

Just doing the annual maintenance and the routine maintenance that is required on cars contributes to the longevity of that asset.

So we launched this campaign on network TV and radio as well as English and Spanish language advertising.

And I think that it is important to point out, as the only national auto parts retailer in the country, we can take advantage of network advertising rather than spot or local advertising, which is considerably more expensive.

There are efficiencies to our advertising.

You can see that our marketing has been driving our same store sales.

If you go back to our fiscal year of 2001, you can see where our comp store sales were in the low single digits.

We launched the new advertising campaign, the merchandising programs and drove this tremendous spike in fiscal 2002.

So our comparable store sales last year were 8%, 9%, 12%, and then -- sorry, yes. 8, 9, 12, 9, and then 7 over the four quarters of the last fiscal year.

It is important to note as we report fiscal 2003, first and second quarter sales, we're lapping these tremendous numbers of 9 and 10% comparable store sales.

But we can continue to innovate and can keep the message fresh by talking about new ways for customers to do maintenance on their cars, new things for them to think about.

One of the innovations this year has been the check engine light program.

We did a study that showed that there are over 25m cars on the road with their check engine light on.

I can see smiles around the room.

I know there are some right here in this room that have their check engine light on.

The check engine light is turned on by the chip, the computer chip that is in the vehicle.

The chips in the vehicle are related to sensors around the vehicle and just measure what is going on.

When something has gone wrong, it triggers the check engine light.

That comes on.

That is part of that $60b worth of undone maintenance.

We launched, part of the campaign we started with the advertising is a new service.

We trained thousands of AutoZoners to go out to the cars and read and diagnose the codes on the car and see what is wrong with the car.

The check engine light campaign has been very successful in the past six months, driving incremental traffic into our stores.

What I would like to do is share with you three radio ads that we are playing currently.

Two of them are in English and one of them is in Spanish that is on network Spanish radio.

If we can roll those adds.

Get in the zone, AutoZone.

It is winter car care season and now is the time to get to auto zone and put a new battery in your car.

You see, if your battery is more than three or four years old it may not make it through another cold winter.

And let’s face it, this is no time of year to get stuck with a dead battery.

So get to AutoZone and replace your old battery today. (Music) Get in the zone, AutoZone.

Get in the zone, AutoZone. (In Spanish)

Hey, does the check engine light in your car stay on while you drive?

Then you need to get to AutoZone and find out why.

At AutoZone we can help you solve a check engine light problem with our free analysis.

We'll tell you what caused your light to come on and show you what you can do about it.

If your check engine light is on, get to AutoZone today.

Get in the zone, AutoZone.

You probably heard, you know, the dozens more ads that we have had.

We rotate them and talk about various maintenance items, we talk about seasonally appropriate items, batteries and the winter things that need to go on the car now and then we’ll have spring car care, we'll talk about new accessories that we added in the stores, et cetera.

It has been a very successful campaign.

Almost two thirds of radio today is heard while people are in their cars, particularly as they are trying to get into their jobs in the morning.

So we advertise heavily on the radio in order to hit people while they are experiencing whatever issues they are having with their car.

It has been successful in driving the traffic.

Other drivers of growth have been the category management process.

People know that category management is not a new phenomenon in retail.

But it is new to our industry.

Categories management is where AutoZone and its suppliers get together and we meet, we have different categories that we are reviewing almost every day of the week.

We get together and strategically review and decide what items should go in, how do we make our items more profitable, what is the right selection.

It is how we work with them, to eliminate out of stocks.

One of the things we want to talk about are the increased levels of inventory in our stores.

And that has been a deliberate thing that we've done in our stores to bring new merchandise in, bring broader coverage of parts into our stores, new brands for our commercial customers and so forth.

But it is important to note that we have strategically added that merchandise and it is largely financed by the vendors.

So unlike other sectors of retail we have been able to work with our vendors to finance that through credit terms and payables.

Our focus is on increasing the ROIC through the use and deployment of our inventory and our capital.

You have also seen new merchandising things we do in the store, like the introduction of the Red Zone.

That is borrowed from football where the Red Zone is the scoring zone.

Our store managers can customize the merchandising to their neighborhoods or in the area.

They can customize it by day.

So if it is raining, like here yesterday, you go in a AutoZone store you see wiper blades and appropriate items to what is going on in the neighborhood or in the area.

Then if it's bright and sunny the following day, they can roll the rain products away and bring in the wash and wax products.

It's just a new addition to our stores, and something which created the excitement of the stores.

We talked about trustworthy advice and our highly trained AutoZoners and ASE certified AutoZoners.

This is part of our successful mix.

We added tremendous numbers of new items and exciting items.

These are the kinds of things that we add and take out over time.

You'll see at any one given time in our stores new and different merchandise.

We'll bring things in for one month and let in them flow out.

Things we don’t even stock in our distribution centers.

They flow in, they flow out.

You'll see all sorts of exciting things happening.

They are new and different.

We keep that going month-to-month throughout time.

So much greater assortment.

Final thing contributing to our growth is our new stores.

As you know, we slowed the rate of opening of our new stores in fiscal 2001 and 2002 as we established a higher hurdle rate for all new project projects.

Our Hurdle rate is 15% after tax for any new project.

We only opened about 100 stores each in the last two fiscal years.

The new stores now track to the higher hurdle rate.

We are very pleased with the performance of the new stores since we made the change.

We will modestly accelerate the opening of new stores to about 150 stores in fiscal 2003.

Let me shift to the commercial market or the do it for me market.

Remember retail is about $36b industry.

This is about a $47b industry.

It's a little larger.

It, too, has had vibrant growth with about a 5% compounded average growth rate.

Our sales -- this is a relatively new effort for us.

We started delivering to commercial technicians just a few years ago.

Our sales are a little over half a billion dollars in fiscal 2002.

But we already have the number three share position already, with only a 1% market share.

I think that this slide depicts how fragmented this industry is.

We talked about the fragmentation of retail.

But the fragmentation of commercial is even more so.

The top three players in the commercial sector only account for 17% market share, which means that 83% is largely mom and pop and unconsolidated kinds of sources , with inefficient three-tier distribution and so forth.

This industry is ripe for efficient players and ripe for change over the long run.

A Z commercial as we call our business supplies professional technicians, we pride ourselves on quick delivery of quality parts and having great parts coverage.

Part of the increase has been in increasing the breadth of our parts coverage.

We also have competitive pricing and we added in the past quarter commercially appropriate brands that are required for the technicians.

Our product is sourced from over 2,000 of our 3,000 locations and is supplied now through a new hub and spoke delivery system.

Part of the inventory increase has been adding the hub stores in the area.

So we have eight distribution centers that deliver the stores once a week.

The hub stores that we added, we have a little over 80 hub stores now.

They then run routes from the hub stores every single day to top off the satellite stores and make sure we are always in stock and ready for our commercial and retail customers.

Two target customers on the commercial side.

First of all all, the up and down the street customer.

And second, the chain accounts.

From an up and down the street customer, imagine Joe's garage.

Those customers are in a 3-mile radius around our stores where they can diagnose a problem with their master technicians and call us on the phone.

Within 15 to 30 minutes we can have a part there.

That is very important to them.

Speed of delivery is critically important.

Around the huge footprint of the number of stores we have, we can differentiate ourselves by getting the part there faster.

The second customer is the chain account.

Here think of Firestone, one of our top chain customers.

They have a national footprint of stores.

Without AutoZone they would have to go negotiate parts deals with all the mom and pops pops.

With AutoZone we can cover all of their, virtually all of their stores around the country and negotiate one parts supply deal.

We also have established a small commercial sales force for the are first time in the past six months who go out and actively call on potential customers.

We have the All Data product, which we have in the back of the room.

Stop by the booth and see all Data.

You wonder how the technicians can keep up with a Ford here and Chevy here and Volvo here.

It’s because we provide them with all data on line or via DVD.

We provide the software, giving them the technical specifications and repair instructions for all the cars on the road.

Terrific, terrific product for us.

We supply over 40,000 technicians today.

A Z commercial is an important additive business for us.

Think of this primarily as a retailers with all of our infrastructure in place, all of our distribution systems and brick bricks and mortar in place, it gives us the opportunity to add the incremental sales to new customers, the technician technicians and leverage all of that incremental asset, or that asset base that is in place.

So it accelerates the profitable growth and it is highly incremental to our return on investment capital.

You have seen our return on investment capital increase as we have improved our store metrics.

It also will continue to increase as A Z commercial becomes a more important part of our business business.

Third area of growth is Mexico.

Today we have 40 stores, mainly along the border.

Mexico is a country with an abundance of old cars and bad roads, a perfect kind of place for us.

They have a shortage of quality parts and really not a very highly sophisticated supply chain.

So that has been a challenge for us and we have opened the distribution center.

Mike will talk about that, for the first time in Mexico in this past quarter.

Our priority in Mexico is to continue our expansion, but do so in a very profitable way.

We will hold our Mexican investments to the same hurdle rates as U.S. investments while we prudently expand in that country.

Just some numbers for AutoZone over the past year and over time.

You can see we are a non-cyclical player.

Our sales have increased over time very consistently.

We have had a record year every single year with a compounded average growth rate of 18%.

Our earns per share have compounded very nicely at 25% growth rate.

You can see that over the past two years we have doubled our earnings per share from $2 a share to $4 a share, with a 68% earns per share growth rate just in the past fiscal year.

This shows our cash flow per share, which is a very important part of how we manage the business as our focus is on return on invested capital.

The cash flow per share has increased dramatically with almost $7 a share in cash flow over the past year contributing to that $4 a share in earnings.

So very high quality earnings.

We are the sector leader with over $5b in sales.

You virtually have to roll out the next three or four players to get to AutoZone's size and scale.

We have the best financial structure in the industry with almost a 15% EBIT margin which is nearly double what our next near nearest competitors are.

Terrific, terrific business model.

We are pleased with the return on invested capital capital.

We had 19.8% return on invested capital in fiscal 2003.

Michael will talk that we edged that up slightly now as we add the first quarter of 23.

We are at the highest level certainly in the industry.

We are one of the highest and most efficient retailers in the country today.

This chart outlines where we were in fiscal 2001 and how our numbers compare in fiscal 2002.

We are pleased that every line item on this chart is positive.

And we had just a terrific year with net sales up 11%, operating profit up 42% and so forth, with cash flow per share virtually doubling in the fiscal year.

Just an exceptional, exceptional performance by our AutoZoners by any measure in the past fiscal year.

Our return on invested capital is critically important.

You can see in the red line here how our return on invest invested capital has flowed over the past half dozen years years.

You can see at one time we were at a 20% return on invested capital.

We worked very hard to return our ROIC to those levels.

You can see that our shareholders really do value return on investment capital and use this as a measure of shareholders value.

You can see the multiple tracks to return on capital on our business.

Our shares have responded accordingly.

You can see, hard to read, but AutoZone's share price index back to '97, it it's in the square line compared to our peer group and the S & P 500.

You can see that we have outpaced both our competition as well as the S&P in the past couple of years, so significant shareholders value added.

And this has really been driven by our strong financial discipline.

We focus on driving economic growth.

We have increased the sales per square foot and therefore the productivity of our stores.

We improved our real estate, have better expense controls than ever before, strong profit margins, great long-term cashflows and improved return on invested capital.

But we do that also with a terrific eye to corporate governance.

Of course, Charles Nelson joined our board a couple of years ago and brought to us some tremendous expertise in corporate governance but we have been on the forefront with the early adoption of corporate governance principles in fiscal 2001 before anyone knew what it was all about.

We created the nominating corporate governance committee.

All of the committees are comprised of independent directors, and we have restructured our board of directors, instituted a code of conduct, we have annual election of directors, we have no poison pill.

I’m the only employee of the company who is a director.

We have done the kinds of things that subsequently have been passed in various ruling bodies.

We are proud of where we stand in our corporate governance.

So that really wraps up our fiscal 2002.

It has been a tremendous year.

We now would like to shift and share with you the results of our first quarter fiscal 2003.

Mike Archbold will share some of those results with you.

Mike?

Thank you, Steve.

I apologize in advance if my voice sounds a little bit raspy and if I fade out, Steve will come to my rescue.

That being said we are pleased to have reported this more than morning before the market opened the results of first quarter 2003.

It was another great quarter.

The first quarter continued our trend of record sales, record EBIT margin, record cash flow and record EPS , even against a strong performance in our prior year.

This quarter we reported 4.5% comparable sales increase and 37% increase in earnings per share that you see on the screen there.

For the quarter total sales increased 4% from the year ago 1.219b.

Excluding the sales of TruckPro which we sold in December of last years, total sales increased 7%.

The same store sales as I mentioned were up 4.5.

The increase in sales continues to be driven by increased traffic, and increased ticket as Steve mentioned before.

But for the first quarter a little more was driven by ticket than traffic.

Gross margin for our quarter as a percentage of sales increased 120 basis points to 45.1%.

And our net operating expenses were 29.6% of sales, down 104 basis points from the prior year.

This resulted in a quarterly operating margin of 15.5% that you see on the screen there, and net income was 105m or 8.6 8.6 percent of sales, which generated the earnings per share of a $1.04.

The strong earnings discipline that we have instituted and the fiscal and capital management resulted in return on invested capital of 20.6%.

We are very pleased with those results.

Let me turn back to the DIY side for a moment.

If you look at the DIY same store sales for the quarter were up 2% against the prior year number was 8%.

Steve mentioned before, we are cycling against some of our very strong comps but posting very healthy numbers on the DIY side.

Total sales were up 3.8% in the DIY piece.

As many of you know, last year we actually had our 53 week fiscal year.

This causes our comparable weeks to be off by one week when we compare the two calendars.

If we had aligned those weeks to be, our comparable DIY sales would have increased 3.4% and total same store sales would have increased 6%.

The trailing 12 months, sales per square foot were up 7% to $262 a square foot and continued to out pace the rest of the industry by a significant margin.

New store productivity also continues to improve and we opened up 31 new stores in the quarter, closed one, replaced one, and we ended the quarter with 3,098 domestic stores.

We are still increasing our market share and more importantly we are expanding the market as we are growing.

Looking at the commercial numbers here, you can see A Z commercial sales and same stores increased 28% for the quarter, while total commercial sales increased 23% as we focused very much on executing our commercial program.

We now have the commercial program in over 2,000 stores, supported by 83 hub stores.

The hub stores provide us with the fast replenishment of the critical merchandise that we need to be able to say yes to our customers and support both of the commercial and the DIY businesses.

Over the past year we have committed many resources to the A Z commercial program and we continue to have success in developing our sales force, developing customers around our existing stores, adding new accounts and implementing new hub stores.

In Mexico, I'll touch on for a moment, continued to do well even with the peso fluctuations.

We have 40 stores compared with 3,098 in the U.S.

It's a very small piece of our business.

This quarter we opened a small distribution center in Mexico.

The Mexico distribution facility will allow us to more effectively support the stores that we have down there, import from the U.S. and be able to develop Mexico based vendors.

Our commitment to Mexico remains to profitably grow the business on a very permanent level.

If you look here again at the P & L, gross margin for the first quarter at 45.1% of sales, up 120 basis points from the prior year.

As in the past, the gross margin improvement reflects our relentless focus on a taking cost out of the business.

The continuing impact of new merchandise, and the benefit of more strategic and disciplined pricing that is the byproduct of our category management process.

The absence of TruckPro from the numbers that you see up here improved our gross margin by 40 basis points year-over-year.

But the majority of the improvement in our domestic auto parts gross margin continues to come from a cost savings, not pricing.

And AutoZone continues to hold the position of price leader in the industry.

Looking at our operating expenses, our previously mentioned focus on expense control has begun to bear fruit .

The first quarter SG&A dipped plow 30% for the first time since 1998.

It was 29.6% of sales down 104 basis points from last year.

We are very pleased with the progress we made in controlling expenses, even though we continued to see room for improvement.

We continue to gain leverage from our store level expenses.

At the store support center we also gain gained leverage from controlling the staffing at the home office, controlling salaries, controlling IT spending, and we have been effectively managing medical and insurance costs.

Advertising costs, net of our co-op had little change even though advertising frequency increased dramatically in the quarter.

This was accomplished primarily through the more effective purchasing of radio on a national basis that Steve mentioned earlier.

All of this resulted in an operating profit for the quarter which was 188m, up 2%1 fl from last year EBIT margin up 223 basis points to 15.5% of sales.

This is the best first quarter EBIT margin performance in the company's history.

Interest expense for the quarter was 19.1m, compared with 19.4.

Decrease primarily resulting from lower short-term rates.

Tax rate changed slightly from 38.2 to 38.1.

That resulted in the net income for the quarter of 105m, up 25% from the prior year.

Earnings per share for the quarter were a dollar four, which were up 37% on 101.2m share base.

On a trailing 12 month basis, a few highlights you can see here, similar progress, we have sales up 9% that you can see on the screen.

Improvements again in both gross margin and in our operating expenses, resulted in the operating profit increasing 36% year-over-year.

Net income being up 49% and EPS being up 59%.

The rising EBIT and the falling interest rates actually produced a major improvement in our financial ratios which you can see here.

Our EBITDA to interest coverage is 11.6 times for the trailing 12 months compared with 7.4 last year.

Our leverage statistics which we reflected as adjusted debt to EBITDA has improved from 1.9 from 2.3 times in the prior year.

All right, thank you.

Turning to our cash flow, in the quarter we used 39m of our cash flow before we re repurchased 1.1m of our shares for $79m.

The trailing 12 months, we have generated $676m of free cash flow, which was driven by $920m of EBITDA and we used that cash flow which far exceeded our capital needs to be able to purchase our stock and we purchased over the trailing 12 months $708m of our common stock.

The factors we look at when we consider our opportunities for share buybacks are first and for most share price, our debt capacity and accretiveness to earnings per share.

Since the inception of the share repurchase program we have repurchased 62.5m shares at an average price of $34 which has created tremendous accretion in the past few years.

We continue to focus on improving the return on invested capital, even after reporting the 19.8% that Steve mentioned last fiscal year and for the trailing four quarters we reported yet another improvement to 20.6% ROIC 26% ROIC.

This relentless focus that we have on return on invested capital underscores our belief That it is the truly the best indicator of shareholder value.

Turning to the balance sheet, gross inventories are up 12% as you can see on the screen.

Let me point out here, this was a deliberate one-time increase in our inventory levels levels.

We deliberately increased our gross inventory in the quarter to reduce out-of-stocks, to add commercial brand coverage, to add late model parts to support the A Z commercial business, and to stock our hub stores.

And also to continue to expand our good, better, best programs.

We intend to hold the inventory levels on a per store basis that we see here steady for the balance of this year year.

So again, this was a deliberate one-time increase in our inventory levels.

Just as a reminder, inventory in this business is not fashion oriented.

Therefore, it is not subject to mark downs.

For the most part it is return returnable to our vendors for credit and largely financed by the vendors through our accounts payable.

Inventory net of payables, which is what we look at, is actually down 15% versus the prior year.

We improved our net inventory terms in the quarter to 8.5 times from 6.9 times last year.

And accounts payable as a percentage of inventory increased to 75% from 68% in the prior year.

Our total working capital was down $94m from the prior year levels, down to 81m and represented only 1.5% of our trailing year sales, down from 3.5% in the prior year.

This continued improvement in working capital reflects our focus on cash flow and working capital management as it is a key driver of return on invested capital.

Net fixed assets were down 2% versus last year.

Capital expenditures for the quarter were 30.4m while depreciation and amortization totaled 25.6.

Thirty-one new domestic stores in the quarter, up from 15 new stores that we had in the first quarter of last year and that’s on our way towards the target of opening 150 stores in fiscal '03.

Our debt at quarter end is a 1.313b, increase of 33m or 2.5% from the prior year level of a 1.281.

That was done despite the repurchase of $79m of our stock in the first quarter.

As debt continues to be an important part of our capital structure.

It is significantly lowers our overall cost of capital.

Keep in mind the average cost of our equity is somewhere in the mid teens and the average cost of debt is somewhere in the low single digits.

We keep an appropriate amount of debt on the balance sheet in order to manage the cost of capital.

You can see here, shareholders equity actually declined slightly which reflected over the past year the repurchase of $708m of our stock.

Insum, we have reduced the 5.7% compared with a year ago.

The financial health is strong as we have continued to increase earnings and cash flow while improving our leverage statistics.

During the quarter, S & P and Moody's recognized our disciplined capital management as they improved the outlook on AutoZone, Moody's from negative to stable outlook and S & P from a negative to a positive outlook.

During the quarter we also issued 300m of ten year senior unsecured notes, significantly lengthening our average duration of debt and reducing our exposure to short-term fluctuations in interest rates.

In summary, we are committed to maintaining a strong balance sheet and to the conservative application of our accounting standards and estimates.

We are focused on creating shareholder value while being responsible stewards of the capital which you, our shareholders, have provided to us.

Now I would like to turn it back over to Steve for a few closing comments.

Thank you, Mike.

I didn't know whether he was going to make it with his voice there.

We have been looking forward to this for months and what a day to lose his voice.

I would like to say a few things about our outlook for fiscal 2003.

We decline to give specific earnings and sales guidance for the future, but I'll reiterate some of the comments that we have made.

You know, we work very closely with our analysts and shareholders to make sure that we do a good job, I think a great job of having them understand our business model.

And we think that that's a better way to talk about our company.

We believe that our business model does have strengths in both strong as well as weak economies.

I mentioned before I believe we are an a-cyclical, that's not a word but I use it intentionally because it is important, we are neither counter cyclical nor cyclical.

We are pleased with the results of our fiscal 2002, of course.

But we are also very pleased with the momentum here in fiscal 2003.

We have done very well even with the very difficult comparisons that we are now, that we now have versus fiscal 2002.

Remember, though, these comparisons are going to get more difficult in the next couple of quarters before they become easier again.

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

For the first quarter we increased earnings per share, of course, as Mike said, by 37% as we cycled the 9% comparable store sales of a year ago.

In the second quarter, now, we will be cycling 12% comparable store sales which will make those comparisons that much more difficult.

Having said that, we believe that we have many initiatives that will help us to continue to grow in our same store sales.

We have budgeted very conservatively to make sure we maintain the expense discipline and deliver solid returns going forward.

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

At the same time we are dedicated to lowering our expense ratios in the future, even as we continue to make increases in our advertising and marketing spending.

Our objective over time is to get back to the kinds of levels that we have experienced historically with our SG&A level.

Re-purchasing stock is an important tool in managing our overall capital structure.

We believe we should continue to do so as long as it is accretive to our business.

Again, we are not giving specific guidance because we believe we are not managing the business to any specific target as that could actually inhibit performance.

We work our best every day in every quarter to deliver shareholder value.

We are very excited about the progress that we've made in the past year and very confident in our ability to grow AutoZone well into the future.

AutoZone is the clear leader in this very exciting business.

We have a great plan for the future and we have have, of course, the right people to execute that plan.

We are focused on operating the company over the long-term to maximize or optimize shareholder value.

And I'm grateful for the opportunity to be a part of AutoZone these past years and I look forwards to a very exciting future.

What I would like to do now is open it up to the floor for questions before we get into the tally of the votes from the shareholders.

We have mikes that are roving around the room.

If anyone should have a question, please raise your hand.

We have one in the back here.

Yes, sir, I'm John Decker, an investor in Highland, New York.

During your AZ commercial presentation and your predecessor's presentation you talked about the ability to increase inventory substantially to support that business.

And at the same time you are driving down your net of payables inventory investment on the part of the corporation

Right.

What are your normal vendor terms that allow you to do that?

Yeah.

It's a good question.

I think it is important that people understand what is happening in inventory here.

You know, inventory in most sectors of retail is fashion oriented or cyclical.

When inventory numbers go up in most sectors of retail and all the sectors our management worked in, it becomes a red flag.

Our industry is different.

It's a very unique segment where inventory is critically important.

Think about it as the number of cars on the road, the number of parts for a vehicle and what we need to have in our stores.

So we have over 100,000 SKUs.

As new vehicles come on the road, we, of course, have to add the parts for those vehicles.

So it's critically important that we have the right part when people come to our stores.

Remember, if we don't have the part, someone's car is broken.

If we don't have that part when they come to our stores, they need that part.

They will go and find that part somewhere else.

We'll lose a customer.

Our goal is to have the right parts coverage.

But as Mike said, we deliberately increased our inventory on a one-time basis higher than our sales this quarter, strategically.

We did that for a number of reasons.

One, as you mentioned, we added commercial brands to our stores that we didn't have before.

We are largely a private label product retailer.

But we have added some brands that were required for commercial.

That was a one-time step up.

The second thing is, we added new products.

We added, you know, as part of our category management process we want to have good, better, and best ranges of parts so that somebody can always have the appropriate parts at the appropriate value that they are seeking.

So we filled out these good, or the value line over the past quarter.

That has been a deliberate increase.

The third thing is that we have added our hub store network really over the past six to nine months where, which is critical because that, as I mentioned before allows us to deliver the satellite stores daily.

We forced inventory into the hub stores in order to be able to top off the satellite stores.

Finally we were experiencing out of stocks and we have increased the inventory on some of the items in order to account for that.

So what you have seen is a deliberate one-time impact over the course of the, the balance of the fiscal year you should see comparable and steady inventory on a per-store basis.

We are finished with the deliberate increase.

The important part, though, is that we don't pay for that increase in inventory.

In fact, through our category management process our merchants have been extremely successful working with our vendors in order to drive payable terms up.

So over the past couple of years we have increased our payables as a percentage of our inventory from roughly 50% level to the mid 80% level at the end of the fiscal year.

Our goal over time is to get that over 100%.

We don't want to own any of this inventory, of course.

Our average turns vary by customer and so our gross turns are around, two turns a year.

Our net turns have increased fairly significantly over time.

In fact, in the fourth quarter of last year we experienced negative working capital for the first time because of our inventory management.

So it's really important that people understand it was a one time increase to bring up the inventory to our sales an the fact that our vendors are financing all of the inventory.

Thank you for your question.

Other questions?

Yes, sir?

Thanks.

Would you compare the retail sales comp of 1.9 in the first quarter to the industry growth which you described as 4.5% compound annual?

Yes.

Can we get, in the future have people, if you wouldn't mind stating your name and company company?

[inaudible] with Janus.

We did experience 2% comparable stores sales number on the retail side in the first quarter or 4.5% comparable store sales total.

Remember, I commented that over the very long run our industry has grown at a 4.5% growth rate.

So for the 4.5% total comp store sales numbers that we have experienced in the first quarter, it is right in line with the very long run rate.

Remember, quarter to quarter it changes.

We also are cycling those very high numbers from a year ago.

The comparisons get more difficult here for AutoZone.

Remember, we had 53 weeks in the last fiscal year.

This is part of the four week periods we have every five or six years we end up with an extra week.

We had that last week week.

So the comparability shifted from a calendar standpoint by a week.

It is an odd artifact of how the weeks fell.

Had we been on the exact week to week, 13 weeks period, the same store sales would have been about 150 to 160 basis points higher.

So the real comparability is higher.

So we are very pleased with the comparable store sales numbers.

As I point out, that growth, 37% EPS growth rate in this quarter.

We are now facing a second quarter where we lacking the 12% comps.

People have to keep that in mind as they develop the financial models.

Yes, sir?

Greg Conchesky, Marco Consulting Group.

I was intrigued by the plans for building the 150 stores in the future.

Our clients believe it's good for the company, it’s good for the shareholders to make sure the jobs get done on time, on budget, minimal need for repair.

The best way to do that is to use the signatories collective bargaining agreements because the contractors are the ones with the best track record in the community, ready access to the local joint apprenticeship programs.

We have gotten reports that at least in the western parts of the country, we have reports that they are excluded from some of the construction projects.

I have representatives of the building trades today.

We ask if you can put them in contact with the appropriate company personnel to pursue that

We would be happy to do this.

The question is, are we excluding people from bidding on our stores?

I am not aware of that.

AutoZone prides itself on being a culture of thrift.

That culture translates to every aspect of our business.

You know, as a retailer we count pennies.

It is very important to us to have the best cost in everything that we do.

So we competitively bid everything that we do in the company.

And subject that, of course, to our financial hurdles.

If you have some ideas for us to lower our costs even further we would love to hear it afterwards.

If you come up afterwards we will put you in touch with the right person.

Thank you for the suggestion.

Comment in the back of the room, please.

Good morning, David Sino with Gabelli and Company.

Two questions.

You essentially said to expect zero pricing going forward, but the vendors for the past year have been talking about the price increases in the 1% to 4% range.

How do you reconcile those two different points of view?

The commercial growth has been phenomenal.

At what point do you think you have to add D.C.s or trucks or any kind of incremental CAPEX to support that business?

How big do you want it to be as a percent of the total company?

Thank you.

Thank you.

Let me start with the pricing question.

We, the way we deal with pricing is again through the category management process.

Where we sit down with the vendors and we go through a strategic plan category by category.

Then take that down to the SKU level.

You can understand the considerable amount of time and attention we put on this with our management team as well as with our vendors who bring all the data in and so forth.

It is an interesting phenomenon.

In most sectors of retail there is not pricing elasticity.

There isn't pricing up side because there is such high elasticity.

In this industry, it is interesting.

If we do a half price sale on starters, you know, just get that imagine in your head.

Running a half price sale today on starters.

We don't get a lot of people pantry loading those, waiting for the starters to fall off.

Pricing specials like that an deep price cuts really doesn't have a good impact on the top line.

People are waiting for the starters to fail in that case.

As a result, the industry does not do that kind of price promotion.

We have to have the good, better, and best product ranges in the stores in order to have the appropriate value.

So we do have the ability to price over time.

Now, a very small portion of our gross margin increase over the past year has been due to pricing.

So we really haven't moved pricing very much.

We are the price leader.

We believe that we have people following us now in an orderly fashion in the industry.

But we do have opportunity going forward to price, but we want to be mindful of the fact that we have the best prices and best price perception in the industry.

We don't take that lightly and want to make sure that we maintain that over time.

The second question related to commercial.

Your question is how high would we like it?

The commercial business has been terrific.

It was 17% same store growth last year.

It has been a terrific same store grower in the first quarter.

And that business, I think that speaks first -- it's a small base.

So $.5b. 10% of our total sales.

So the percentages, the big percentages are on a small base, admittedly.

But I think it really has come from our deliberate and strategic effort to expand the commercial programs and by having the right inventory in the stores for our commercial customers.

Also it has been a product of adding the sales force, The small sales force who go out and prospect for customers.

We are developing the commercial customers every single day and we’re calling on chains.

We will continue to see growth over time.

You know, to develop a commercial customer does a lot of take, takes a lot of calls.

Even when you win the business in the chain you have to sell it to every individual operator in the marketplace.

We could land a chain today and see the sales ramp up and continue to grow over, say, a five-year period following landing a chain.

So I see this as a very long-term growth vehicle for us.

The market is roughly half and half, DIY and commercial.

So, you know, over the very long period of time, very long, you know, there's no reason why our numbers need to be 90%, 10%.

We can continue to move that up over the long run.

So we are very bullish in the commercial business.

Yes, sir, Matt?

Good morning, Matthew Fassler from Goldman Sachs.

I would like to focus on two issues.

A couple additional questions on commercial.

If you can shed light as to the resources being dedicated to commercial, the number of commercial stores versus the fourth quarter, the number of hub stores.

And also a little bit of detail on the growth of the sales force would be very helpful.

Thank you, Matt.

Obviously we have been ramping up the commercial program over the past 9 to 12 months.

And we had roughly 1,700 commercial stores during midyear fiscal year last year.

We are now up to 2,000 stores.

That has been part of the inventory lift, too.

We have added the commercial brands into those stores.

We are pretty pleased with this level for now, 2,000 of the 3,000 stores.

We are very scientific about how we do our commercial programs.

We know exactly how many service bays are required in a three-mile radius around those commercial programs in order to make this an economic prospect.

So we very deliberately do that.

We also have added a commercial specialist in those stores as well as a delivery, small delivery vehicle.

So it is important to note that the incremental fixed assets to add a commercial program are extremely small.

So, therefore, the sales and the profitability is largely incremental.

In fact, entirely incremental.

Therefore, the return on invested capital is very, very high on the commercial sector.

We also added as you said a small commercial sales force and expanded our hub stores in the past quarter.

I think we added what, about ten hub stores, round numbers, in the past quarter.

Those hub stores are important.

We will continue to add them modestly over time in order to better service the satellite stores in any given market.

You had one more question, Matt, go ahead.

As we visited the stores, we have seen a number of instances where you have been raising the fixtures on the aisles, if you will, the risers or what not.

If you can talk a bit about how you are thinking about the stocking of that incremental shelf space, what it means for the use of your back space, whether it's related to commercial and the overall thought process of that.

Thank you.

You know, our vision is to relentlessly create the most exciting zone for vehicle solutions.

As any retailers knows, you have to make things exciting.

Any store you go into that doesn't change or is static for a long period of time, you see declines in sales.

If the customers see the same thing every time they come into a store, pretty soon they stop seeing it.

And they start just going, go to the parts counter.

Our intent has been to change things up a little bit in the past year.

And you've seen some of that in the stores that you have been in and that we visited together, Matt, where we have raised -- we have had very low fixtures for the last dozen years, you know, with very precise ... now we are raising them, putting more things in the stores, re rearranging things.

As we do that, when -- remember, we have 6m people per week in our stores.

As they come through the stores, they are seeing new things for the first time.

They may be new merchandise, but they may be merchandise that has been there all along that they hadn't noticed.

As we do that, we tends to build our average ticket size and so forth.

We actually do in and out items, too.

I know you commented before on, you know, we'll do some seasonal things and put in -- they will be in the stores for a month.

Sometimes they are not in all the stores.

We will put them in 100 stores here, a thousand stores there.

We are very cautious on how we do this.

We want it to be exciting and new and different.

Over time you'll see the stores evolve and change.

Maybe we will go back down and lower the shelves, you know, a few years from now now.

Expect that, because what we are trying to do is keep the stores exciting and flesh fresh.

Don over here?

Go ahead.

John Lawrence from Morgan Keegan.

Would you comment on the category management a little further?

Other sectors of retail have done well with this.

What are you seeing as you share data with the industry?

Great question.

Category management has only recently come to our industry.

Our merchandising people have worked very closely with the industry association to help develop that.

We call it the enhanced line review process in the industry now, where the vendors are now coming in, sharing resources and doing analytics behind it.

We think it can continue to contribute to our growth as we go forward as we add the right sku’sand we start customizing sku mix store even more by store.

We think it will add to the gross margin as we lower our costs and work with our vendors and we have this now as a forum to work with our vendors ongoing and work with them on lowering the manufacturing costs even.

We are sending our engineers into various plants to help them become more efficient in how they manufacture.

That is what is coming out of the line review process.

That cost then is shared you know, by them and as well as by AutoZone.

Our gross margins can continue to increase.

Remember, because we are not hugely price sensitive from a promotional standpoint, we can allow those cost savings that we help develop with our vendors, we can allow those cost savings to flow to the bottom line, there by adding to our margins and adding shareholder value over the long run.

It is really a great, great process that we have brought in.

As you mention, we will begin sharing data, common data as most other sectors of retail do.

We think that will help us create even more quantitative analysis so we can do things more precisely and scientifically going forward.

Thank you.

Other questions?

Yes, sir.

This past year I traveled from Calgary over to Vancouver and I saw lots of vehicles.

I guess I'm wondering, in fact I saw some competition in that area, some of them had like six commercial trucks.

When will AutoZone be in Canada?

Because those Canadians do need a little cost reduction in their price (laughter).

That's a long drive, all the way across.

Did you actually see a lot of vehicles in that drive?

There aren't very many people up there.

You know, Canada is a great area, but you know, we have our growth priorities, first of all the U.S. retail business, second, A Z commercial and third, Mexico.

We did that because we believe even with 3,000 stores today across the U.S. we have tremendous opportunities to grow our store base profitably beyond where we are today.

Secondly, we think as we discussed before that there is tremendous up side to the A Z commercial business which comes right out of the current investment that we have in our stores.

So that is hugely financially additive.

Third, Mexico.

You know, Canada is a much smaller and more organized and well developed area for us.

We really don't prioritize that area for us because of the tremendous opportunities we have here in the U.S. and with our current investment base.

Okay.

Yeah?

One other question.

Jack Baylist, Midwest Research.

My question concerns operating expenses.

You control them extremely well.

How are you doing that, particularly at the store level and also other retailers have complained in terms of the giant increases in health expenses, medical, other insurance.

Can you elaborate how you have been controlling that in particular at the store level, whether it involves any store hours.

Thank you, Jack for that question.

It's a great question.

It is a focus for us.

Our SG&A level includes store SG&A as well as medical costs as well as the headquarters costs and so forth.

We have been relentless about focusing on our SG&A.

You know, sometimes people in good times they let their costs rise.

Then it gets out of control.

Of course, you know, things then are tougher to rein in later.

In our case we have taken this opportunity in good times to lower our costs and to focus on that.

We have done it through a number of ways.

The one thing we have not done, we have not taken labor out of the stores.

That is our product.

We've got to make sure we have the right service levels in the stores at all times and, you know, as you know, Jack, our stores are comprised of AutoZoners with tremendous amount of training, a lot of fulltime people.

It is important that we can be there and service our customers at all times.

We have been very cautious not to take costs out there.

Virtually every other element of the P & L has been open.

We have had a focused effort with dozens and dozens of projects.

Examples are, we ship things in totes to our stores.

They are plastic tote containers.

We have labels on those totes.

Those labels are expensive.

And we have been able to negotiate a new label contract that saves us hundreds of thousands of dollars, just with a re-bidding a label contract.

You can imagine, I deliberately picked a small item like that.

You can imagine the number of things across the company of our size that we have in that regard.

So we are deliberately going through and re-bidding everything and making sure that we have the right cost.

As it relates to medical expenses, you know, it is an issue around the country.

You know, medical costs clearly are rising and pharmaceutical costs are rising.

We have successfully dealt with our medical costs by, through program redesigns and again re-bidding the programs and going to new vendors and so forth.

Through program redesign and employee contributions and so forth, we have been successful at managing our insurance and our medical costs.

Okay.

Let's do one more question and then I think we'll turn and wrap up the voting right here, please.

Yes, Brett Jordan with Advest.

A question on the new sales force, do you have a feeling of the contribution they have added and also on the inventory side you mention mentioned you are filling out the value line but you also talked about increasing the commercial inventories which traditionally are hard to value line, a feeling for which the scale of inventory increased.

Brett, your question is a little more on the sales force and a little more on the value line.

What is the sales force contribution on the the national accounts and separate question on inventory.

Right, right.

Yeah, the sales force, you know, prior to this we have not had an outreach program for our sales force, sales effort in our commercial area.

We have commercial specialists in each of our commercial stores who are there, who really understand the customers' needs, understand what parts are required and it takes the calls from the service technicians and dispatch a trucks deliver those calls.

So what we were missing is somebody to go out and call on new customers who already were buying from us.

We put a small sales force on the street and we recruited them as experts around the industry who had existing customer relationships.

We brought them in, we trained them now and sent them with prospects around, we are focusing on a three-mile radius as well as our national accounts.

We have been very successful initially at landing new customers.

This investment in the sales force pays out very rapidly, as you can imagine, with new business.

But remember, as we add these chain accounts, they develop over a very long run.

So the chain customer will say, you know, yes, we are there.

We are going to recommend AutoZone as the first call for our business and then we have to go out and we have to call on all of the independent operators or their franchisees or their company owned stores and that process takes a long period of time.

As you know very well, the way it works is people have first call, second call, third call, multiple sources because the commercial technicians don't stock the parts.

So they always have to have multiple sources in order to make sure they've got coverage for all of the various parts that they could, you know, encounter in a day.

The second question was on the value line.

And you know, there we have -- it's really important.

There are different customers are looking for different things.

They may have a car that they are working on that they intend to sell in the next six months.

Others may have a car that they want to keep for -- they just bought a used car and want to put an investment into it because they will keep it for a very long time.

Customers are looking for different levels of value and quality.

It is important that we have the entry level line or the value line, which is engineered to the needs of people who want those, that line and that we have the prices associated with it.

So for people who, you know, are shopping around for value iems items, we have those items now.

You know, we are filling out various holes that we had in our line and we have the better and the best levels for people who are interested in those.

So it is a very important part of our strategic mix that comes out of our category management process.

Thanks for that question.

Let me move on now to completing the voting process as it relates to our annual meeting.

Harry, do we have the results of the votes?

Yes, we do.

There are present at this meeting in person or by proxy, 89,105,920 votes, shares of the company's common stock, representing 91.6% of the 97,206,913 shares deemed to be outstanding as of October 15, 2002.

With respect to the election of directors, a majority of the shares of common stock present at this meeting have voted in favor of the election of each nominee with respect to the approval of the AutoZone director stock option plan a majority of the shares of common stock present and voting at this meeting have voted in favor of the adoption of the plan.

With respect to the approval of AutoZone director compensation plan plan, majority of the shares of common stock present have voted in favor of adoption of the plan.

With respect to the ratification of the appointment of Ernst and Young LLP as independent auditors for the fiscal year ending August August 31, 2003, the majority of the shares present and voting have voted in favor of the resolution.

Okay.

Well, based on this report, the nine nominees for the election as directors have been elected.

The 2003 directors stock option plan has been approved and the 2003 director compensation plan has been approved.

The appointment of Ernst and Young for fiscal 2002 has been ratified.

If there is no further business, I call for a motion to adjourn.

Thank you.

The meeting is adjourned.

I would like to invite all of our guests today to pick up a gift bag as you leave and then we do have some samples on the displays in the back of the room.

If people would like, help yourself to one or two of those items.

We are going to do a closing cheer here, which is just slightly different than our opening cheer.

This one is far simpler.

Just give me an A and give me a Z. I would like to invite the AutoZoners up to lead us in the cheer Thank you to all our shareholders and to our AutoZoners for creating the most exciting zone for vehicle solutions.

Meeting is adjourned.

Thank you. ((ACTUAL END TIME 9 46 a.m. eastern time). (Normal termination)--- 0