汽車地帶 (AZO) 2003 Q4 法說會逐字稿

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 5:30 p.m. eastern time.

The call is being recorded today.

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

If you have questions at any time during the conference you may press star 1 on your touch-tone phone.

Again that's star 1 at any time to ask a question.

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.

Please refer to the risk factor section of the form 10K for the fiscal year ended August 31, 2002 for more information related to these risks.

Actual results may materially differ from anticipated results.

AutoZone undertakes no obligation to publicly release any revisions to any forward-looking statements contained in this presentation to reflect events or circumstances occurring after the date of this presentation or to reflect the occurrence of unanticipated events.

In addition to the financial statements presented in accordance with generally accepted accounting principles AutoZone has provided metrics in this presentation that are not calculated in accordance with GAAP.

For reconciliation of these metrics.

Please see AutoZone's press release at the investor relations section at www.autozone.com.

Mr. Odland you may now begin.

Thank you, and thanks to everyone for joining us today for AutoZone, Inc.,'s 2003, fourth fiscal quarter conference call.

With me today are Mike Archbold, AutoZones Sr.

Vice President and Chief Financial Officer, and Brain Campbell, our Director of Investor Relations.

I hope you've had an opportunity to read our press release and learn about our strong results.

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

Just click on investor relations to see them.

We're pleased to report another record quarter and fiscal year.

The fourth quarter continued our trend of record EBIT, record EBIT margin and record earnings per share even against a record quarter last year that included one extra week.

This quarter we reported a 3% comparable sales increase on top of a 7% increase last year, and a 47% comparable increase in earnings per share on top of a comparable 61% increase last year.

In fact, this quarter's EPS was higher than the EPS for the entire fiscal 2001 year.

Now, remember last year had an extra week in it in this quarter, so for the 16-week quarter this year we reported sales of $1.829 billion dollars, a decrease of 0.8% from that fourth quarter year ago when we had 17 weeks, and that was ended August 31st of 2002.

But if you exclude the sales from the extra week in last year's numbers, our sales were actually up 5.5%.

Same store sales, or sales for domestic stores open at least one year, increased 3% during the quarter, including 1% retail same store sales and 24% increase for commercial same store sales.

Same store sales are computed on a comparable 16 and a 52-week basis.

Gross profit as a percentage of sales for the quarter improved by 1.90 percentage points, while operating expenses as a percentage of sales declined by 0.86 percentage points.

This resulted in reported operating margin of 19.7%, up 2.76 percentage points from last year.

Operating profit increased 15% over the prior year.

However, both years, this year and last year, were impacted by certain nonrecurring items, and those were as follows: For fiscal 2003 fourth quarter a $4.6 million dollar pre-tax favorable adjustment for the reversal of restructuring accruals, for fiscal 2003 fourth quarter a $7.4 million dollar pre-tax negative impact related to the continued implementation of emerging issues task force issue 02-16.

And for the fiscal 2002 fourth quarter, a $29 million dollar pre-tax positive impact based on that benefit of the additional week last year.

So if you exclude all of these items, the comparable operating profit increased 28% as operating margin improved 3.55 percentage points and 19.8% from the 16.3% level achieved last year.

Net income for the quarter increased by 17% to $207.4 million and diluted earnings per share reflecting net income and the benefit of our share repurchase program increased 31%, to $2.27, from $1.73 reported in the year-ago quarter.

Excluding the nonrecurring items comparable net income increased 31% and earnings per share increased 47%.

Our strong earnings growth in our disciplined capital management resulted in a record return on investment capital for the fiscal year of 23.4%.

Now let's turn to some of the details.

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

For the quarter, total retail or DIY sales were down 0.8%, for the business, however, again, excluding that extra week sales were actually up 5.5%.

Same store sales were up 1%.

It's important to note here that this marks very strong performance considering in last year's fourth quarter we enjoyed above 5% retail comps.

This quarter we were also able to keep the sales generated from that period last year and also expand on them.

We were successful at maintaining our growth from last year into this quarter.

This is not an easy accomplishment, and it's very encouraging to see that our initiatives are paying dividends in this quarter's financial results.

Our same store sales performance has been good considering that we only opened about 100 stores each in the previous two fiscal years and we've not made acquisitions since calendar year 1998 to impact our comps.

Remember, since stores mature over a multiyear period, same store sales results can be inflated as a large number of new or acquired stores cycle their first year but that's not the case at AutoZone.

We continue to build sales in this our core business.

We have many growth opportunities as we continue to focus on relentless innovation.

Advertising and merchandising programs continue to be the primary drivers of our volume.

We have followed up on our extremely successful get in the zone radio campaign with complimentary television messaging.

We continue the campaign into this quarter with very positive feedback from both our customers and our AutoZoners.

Our continued focus on marketing opportunities towards our younger customers, especially with regard to making our stores a cool place to shop, has shown continued results.

And our ongoing focus on targeted marketing opportunities offer proven growth opportunities for us.

Our introduction of the high gondolas on every other aisle in our stores enables us to keep our merchandising fresh and compelling and then create departments within departments.

Front-end sales growth has continued to be strong with the innovative red zone and continued new merchandise introductions.

More recent initiatives include the new truck zone and line extension into tools.

We continued our commitment to establishing a good, better, best delineation for most hard parts categories.

We will extend our Value Craft and Duralast brands.

Value Craft and Duralast, as you know, are our private label brands, and AutoZone's proprietary brands in total now represent more than 50% of our sales making AutoZone the exclusive place to get some of the most recognized brands in the business.

Also our store refresh program, along with our HUD store opportunities, continue to make us excited about the future.

For the fiscal year sales per square foot were up 2.3% to $264 dollars per square foot and continued to set the pace for the rest of the industry.

New store productivity continues to improve.

We opened 68 new stores in the quarter, replaced two, and closed one, for a total of 3,219 stores open at the end of the quarter.

So year to date we've opened 160 stores, replaced 6, and closed 9, for a net 151 new stores.

Next year we will open approximately 195 new stores for a roughly 6% square footage increase.

We have many DIY opportunities ahead of us and are excited about our future and will focus to put all of these opportunities into motion.

Now turning to the A Z commercial business.

Our A Z commercial sales in same stores increased 24% this quarter while total commercial sales increased 25%.

Excluding the 53rd week from last year.

As we continued to execute our game plan.

For the year, A Z commercial sales were $670 million.

We now have commercial programs in 1,941 stores supported by 115 hub stores.

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

We have committed much focus on the A Z commercial program over the past year and we continue to have success developing our sales force, developing our customers around existing stores, adding new local and chain accounts, and implementing new hub stores.

We have balanced our efforts between local customers and chain accounts.

We have been successful in cultivating relationships by using our national reach and parts coverage.

Being the only chain to have national store coverage of company owned and operated sites we are able to have the right parts in stock to supply virtually any chain customer to meet their service expectations.

These facts continue to prove themselves out as our previously announced relationship with Midas begins to roll out.

We have started to service their roughly 1,700 stores with weekly replenishment orders and are expanding the just in time, or what we call the hotshot business.

These replenishment orders began in the fourth quarter and the transition will continue throughout the balance of this calendar year.

With only 1.4% of the commercial sector's business, AutoZone has a significant opportunity to gain market share.

This sector is highly fragmented and we are already the third largest player.

In an industry that the automotive aftermarket industry association, or the AAIA, says is $48 billion in size and is growing at 4.8% a year, we are confident that our model can continue to grow and add shareholder value over time.

In Mexico, our stores continue to do well in the quarter, even with the continued peso fluctuations and economic uncertainties.

We opened six stores during the quarter which now gives us 49 stores in Mexico compared with, of course, 3,219 stores in the U.S.

Our ongoing commitment remains to prudently and profitably grow the Mexico business.

Gross profit for the quarter was 47.6% of sales, up 1.9 percentage points from the prior year.

Excluding the nonrecurring items, comparable gross profit was 46% versus the 45.7% achieved last year. 1.61 percentage points of the improvement were driven by the reclassification of vendor funding from SG&A to gross profit due to EITF issue 02-16.

And a remainder of the 0.29 percentage points of the improvement in gross was directly attributable to our continued category management efforts.

We have been successful in partnering with our vendor community to offer the right products at the right prices to our customers.

This effort includes supply chain initiatives, tailoring merchandising mix, continued implementation of our good, better, best initiative, price negotiations with vendors, shifting responsibility for warranty, and adjusting prices where appropriate, and so on and so on.

We're working harder today than ever before in creating the most exciting zone for vehicle solutions.

Now turning to expenses, our focus on expense control has shown great results.

SG&A for the quarter was 27.9% of sales, down 0.86 percentage points from last year and we're pleased with our ongoing progress towards controlling expenses, even though we see continued room for improvement.

The adjustments for credits previously recognized in SG&A and now reported under cost of goods represented an increase to SG&A expenses of 2.02 percentage points.

Without this shift, SG&A would have improved to 25.9% instead of the reported 27.9%.

We recognized a 3 cent earnings per share gain due to the reversal of some of our restructuring accrual established at the end of fiscal 2001.

We reserved at that time $157 million pre-tax for the effort, and this reversal represents only $4.6 million, or 2.9% of that original reserve.

And as we've completed all of our initiatives associated with that charge we're pleased with the successful disposition of properties and leases for higher than expected prices which resulted in this adjustment.

We continue to show leverage of store level expenses at the store support center we also gain leverage from controlling staffing, salaries, and IT spending.

We've also been effectively managing our retirement medical insurance costs on an ongoing basis.

Store payroll has continually managed -- has been continually managed appropriately to reflect the seasonal demands of our business.

We have continued our very long time practice of utilizing part-timers to complete our store's scheduling needs during the summer peak season.

As business historically spikes up during the third and fourth quarters we flex up the part-time hours to manage that extra short-term demand burst, then the trend reverses itself as the fall months begin and sales taper off and we move towards a heavier full-time mix.

Advertising costs net of co-op were once again down versus last year though our advertising region frequencies continues to increase and we continue to roll out our television campaign in the quarter.

EBIT for the quarter was $360 million, up 15% from last year.

EBIT margin was up 2.76 percentage points to 19.7%.

On a comparable basis, EBIT for the quarter was $363 million, up 28% versus last year while EBIT margin was up 3.55 percentage points to 19.8%.

This is the best quarter EBIT margin performance for any quarter in the history of our company.

In fact, this marks the best full year EBIT performance in our company's history with the ability to continue to grow profitably.

We continue to see possibilities to improve our gross margin and SG&A as a percent to sales in the future.

Interest expense for the quarter was $26.7 million dollars compared with $24.7 million dollars a year ago.

The increase reflects our issuance of long-term debt in both the first and the third quarters, along with an increase in total debt outstanding by $352 million.

These factors were partially offset by the lack of the extra week in this year versus last.

In total debt ratios are unchanged in proportion to cash flow.

We're very pleased with our ability to lock in rates this past year at historically low levels.

Further, we have filed a shelf registration statement to issue $500 million of additional debt in the future.

For the quarter our tax rate was 37.8%, down slightly from the 38.0% experienced last year.

Net income for the quarter was $207 million, up 17% over prior year.

Earnings per share for the quarter were 2.27 -- $2.27, up 31% on 91.3 million diluted shares.

On a comparable basis net income for the quarter of $209 million was up 31% over prior years while earnings per share for the quarter of $2.29 were up 47% on the 91.3 million diluted shares.

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

Mike?

Thanks, Steve.

In this quarter we generated $320 million of cash flow, reflecting $91 million generated from working capital before we repurchased 5.8 million shares of stock for $447 million.

We continue to drive this decrease in working capital, primarily due to our accounts payable growing as a percentage of inventory.

Of the $447 million of repurchases, $151 million was actually purchased on the balance sheet during this quarter.

The remaining $295 million was purchased under forward agreements which were settled at the beginning of this quarter.

For the fiscal year, we generated $539 million of cash flow from a record 1 billion dollars of EBITDA, which was that primary source of funds used to purchase a total of $891 million of our common stock.

Since the inception of the share repurchase program we have bought back 72 million shares at an average price of $39.25 per share.

In recent days we've received inquiries regarding at what levels we think buying back our stock continues to be accretive to earnings.

Let me stress, it is nowhere near these levels.

We will continue to repurchase shares as long as it is accretive to earnings.

We continue to focus on improving ROIC.

For fiscal 2002 we achieved a 19.8% ROIC.

For the fourth quarter of this year we report yet another improvement to 23.4%.

Our relentless focus on ROIC underscores our belief --.

please stand by for the AutoZone conference.

It will continue in just a moment.

Again, please continue to hold.

The AutoZone conference will resume in just a moment.

Sir, you may begin.

Okay great.

Operator, I just want to confirm that we've got everyone back on the line.

I apologize to everyone for that technical interruption there.

We were talking about the share buy-back, and I think I left off in talking about inquiries that we've gotten recently regarding at what levels we think buying back our stock is accretive, and I will mention, it's nowhere near these levels, and we expect to continue to repurchase shares as long as it's accretive to earnings.

Turning to ROIC, we continue to focus on improving our return on invested capital.

For fiscal 2002 we achieved a 19.8% ROIC.

For the fourth quarter of this year we report yet another improvement to 23.4% ROIC.

Our relentless focus on ROIC underscores our belief that it along with EPS growth are the best indicators of the creation of shareholder value over the long term.

Looking at some of the balance sheet highlights, I'd like to point out gross inventories are up 10% versus the prior year.

However, as we previously discussed, we've maintained our inventory per store at levels lower than the first quarter while also dramatically reducing net inventory per store versus the previous quarter.

We've purposely increased first-quarter inventory levels and we pre-announced that intent.

We've followed up by committing to hold inventory levels per store sequentially flat.

Since then we've met this commitment.

In fact, gross inventory levels on a per-store basis were actually down slightly on a sequential basis this past year.

We expect to continue to manage inventory to a roughly flat level sequentially on a per-store basis.

Thereby showing favorable absolute dollar comparisons this upcoming first quarter fiscal 2004.

Lastly I'd like to point out that all of our inventorie additions have been largely financed by accounts payable.

We've improved our net inventory turns in the quarter based on ending inventories to an 18.5 turn from 13.8 turns last year.

Accounts payable as a percent of inventory increased to 87% from 83% last year.

Finally I want to reiterate that our goal continues to be to achieve a 100% accounts payable to inventory ratio over time.

Additionally, we're committed to our mandate of achieving a 15% after-tax IROI threshold on all projects therefore all the inventory supporting our stores no matter how quickly or slowly they sell will not be added unless they can achieve that hurdle.

Total working capital was actually down $7 million from a year ago level, to a negative $91 million and was again this year a source of cash.

The continued focus on working capital reflects our focus on cash flow management.

Additionally, we continue to work with our vendors on both a vendor A-R factoring program to reduce their cost of borrowing as well as our new pay on scan opportunity.

The pay on scan program was introduced to our vendors earlier this year.

Essentially the program is designed around having ownership and inventory management of merchandise reside with the vendors until it's purchased by the ultimate consumer.

This initiative encourages AutoZone and its vendors to focus on taking costs out of the entire supply chain and ultimately growing the customer sales.

Net fixed assets were up 3.3% versus last year.

Capex for the quarter totaled $84 million, and for the year was $182 million.

Depreciation and amortization totaled $34 million for the quarter and $110 million for the year.

We opened up 68 new domestic stores in this fourth quarter after opening 31 stores in the third quarter.

This brought our total number of new stores to 160 this year, for the net 151 incremental stores that Steve mentioned earlier.

Our debt at the end of quarter 4 was $1.547 billion, an increase of $352 million, or 30% from the prior year level of $1.195 billion, due to our increased cash flow which provides us with that additional debt capacity.

We will continue to manage our adjusted debt levels, including leases, to roughly 2.1 times EBITDA.

Debt continues to be an important and strategic part of our capital structure.

It significantly lowers our blended after-tax cost of capital.

The cost of equity is significantly higher than the cost of debt.

Shareholders equity on the balance sheet declined, reflecting the repurchase of $891 million of our common stock over the past four quarters.

And our return on equity for the fiscal year was 97.4 % versus 55.1% last year.

With these trends EBITDA to interest coverage is now 12.1 times for trailing 12 months compared to 11.1 times last year.

Adjusted debt to EBITDA is at 1.9 times, up from 1.8 times last year.

Last year, taking into account stock forward agreements that were in place at the end of the year, we would have had a 2.1 times adjusted debt to EBITDA ratio.

As of August 30, 2003 AutoZone continues to be one of the few players in our industry to have investment-grade debt ratings.

Our senior unsecured debt rating from Standard & Poor's is BBB plus and we have a commercial paper rating of A-2.

Moody's investor services has assigned us a senior unsecured debt credit rating of BAA-2.

And a commercial paper rating of P-2.

We continue to be comfortable with our long-term debt ratings and our leverage ratios.

Our financial model is strong and we've continued to increase earnings and cash flow.

Lastly, as required, we adopted the new accounting standard emerging issues task force this year. 02-16, which is accounting by customer for cash consideration received from a vendor.

Under these rules there's a presumption that amounts received from vendors should be considered a reduction of product loss.

Previously some vendor funding could be classified as a reduction of SG&A.

Now the ruling says all vendor funds must be offset to cost of goods as new agreements are entered into or are modified.

Therefore, it will reduce the cost of goods sold and not be reflected until actually sold.

EPS is lowered temporarily versus the previous treatment as there's a delay in recognizing these vendor funds.

But this pronouncement in no way impacts the way we run our business or our negotiations with vendors.

It simply results in a noncash effect for a new accounting pronouncement.

This ruling stipulates timing as to when previously received vendor funds can be recognized into income.

By materially modifying all of our vendor agreements this past quarter we're now able to put this reclassification behind us as all future vendor funds will be recognized as credits to cost of goods sold.

The total impact from this new pronouncement was estimated to be 16 cents per share.

With 2 cents recognized in Q3 of this year, 5 cents now recognized in Q4, and the remaining portion of approximately 9 cents per share will be recognized evenly throughout fiscal 2004.

For all of 2004 it's estimated that this pronouncement will result in a roughly 270-basis point shift from SG&A to gross.

As you may recall we previously indicated an SG&A target of 28% of sales over the next couple of years.

The reclassification of 270 basis points would actually increase this target to 30.7, but since we continue to see opportunities to leverage SG&A, we're establishing and have established a revised target of 30.0% for sales.

Lastly regarding the EITF 02-16 I'd like to reiterate that AutoZone would have absolutely preferred to do a one-time cumulative adjustment.

We were precluded from doing so by the accounting standard itself but we will follow EITF issue 02-16's requirements to the letter of the pronouncement and expect that all vendor funding will be included in cost of goods sold going forward as we've now amended all of our vendor arrangements.

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

Thank you, Mike.

Now turning to the outlook for upcoming fiscal 2004, as we've said before we continue to believe that our business model performs well in both strong and weak economies.

We're very proud of the result for fiscal 2003 and have done well even against our peak comparisons from last year.

The sales we experience for the year continue to be driven primarily by our advertising and merchandising efforts as well as our expansion in the A Z commercial business.

We believe that we have many initiatives that will help us continue to grow sales over time but we budget very conservatively to ensure that we maintain our expense discipline and deliver solid returns.

Our opportunity to continue to expand our commercial business is vast.

It leverages our infrastructure, drives incremental EBIT dollars with little incremental investment and will be accretive to our current historic high ROIC of 23.4%.

We continue to have opportunities to expand gross margin in coming quarters driven by supply chain efficiency, mix of business, and improved pricing.

Additionally new programs like pay on scan will help us create stronger vendor focus on sales.

At the same time we are dedicated to reducing our expense ratios even further in the future as we continue to increase advertising and marketing spending.

As noted above the new accounting for vendor funding is estimated to cause a shift of roughly 270 basis points.

However, I want to reiterate our SG&A targeted long-term goal of 30% on an annual basis.

Repurchasing stock is a key tool in managing our capital structure and we can continue to repurchase stock as long as it's accretive.

Our industry-leading results continue to show that AutoZone is a tremendous cash generator which has enabled us to add shareholder value over time.

Lastly I want to point out that this company is never satisfied with current results.

In an industry that's been growing at roughly 4% a year we're happy that we achieved 5.5% sales growth.

As we cycle the previous year's 9% same store sales results we're pleased that our business held firm and grew on top of that base.

But we always want to do better.

We don't give specific earnings guidance because we're not managing the business to a specific target, as that could actually inhibit our performance.

We will work to deliver our best results every day.

In summary, we continue to be excited by the progress we've made over the past quarter and year.

We are confident in our ability to profitably grow AutoZone well into the future.

AutoZone is the clear leader in this exciting industry.

And this upcoming year's plan is very strong.

We can't wait to get going.

We are focused on operating this company to profitably grow sales, efficiently deploy capital, and maximize long-term shareholder value while maintaining the highest level of ethics.

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

Thank you.

Again at this time if you'd like to ask a question, please press star 1 on your touch-tone phone.

Again, that's star 1 to ask a question.

Danielle Fox you may ask your question and please state your company name.

Danielle fox at J.P. Morgan.

Thank you.

I guess I'm wondering what's changed in your expectations regarding adjustments for EITF 02-16.

When do you expect you mentioned sort of a 9 cent hit in the upcoming year.

I'm wondering when you expect to see the benefits of selling through inventory with a lower carrying cost?

Okay.

Yes, as we disclosed previously there was about, on an EBIT basis, about a $25 million dollar impact that we expected for the total impact of the new pronouncement.

Of that $2.6 million was reflected in Q3, and we embarked on an initiative to change all of our vendor agreements through Q4, which would, in essence, move most of the remaining amount into our Q4.

We did change most of our agreements, but it happened a little slower.

In fact, we changed all of our agreements.

But it happened a little bit slower than our original expectation.

Consequently we incurred $7.4 million dollars of that EBIT charge in Q4.

So of the remaining amount, then, of, what's that, about $16 million, we expect that that will really be recognized pretty evenly over the four quarters of fiscal 2004.

So a hit recognized evenly but not a benefit from selling through?

Because presumably you're also lowering the carrying cost of the inventory as an offsetting adjustment.

Exactly, it does actually lower the inventory when you record that, that's correct.

One other quick question.

I'm just wondering, given your strong free cash flow, then you've decided to do a shelf offering, if we should look for AutoZone to use debt more aggressively to finance share repurchases.

The answer is no, we use it prudently.

And we use it -- we manage it to that adjusted debt to EBITDA, our ratio of about 2.1 times.

We feel that that puts us in the sweet spot of the investment grade credit where we are right now.

As we get cash flow from our operations we'll first and foremost grow the business, then with whatever cash is left over we will use it to be able to buy back our stock as long as it's accretive to earnings and maintain those same kinds of leverage ratios.

Thank you, John Lawrence, you may ask your question.

Please state your company name.

Yes, Morgan Keegan.

Good afternoon, guys.

Hi, John.

Steve would you comment on the fourth quarter.

I guess ever since the third quarter call, how the retail DIY comps tracked for the quarter.

You know, as you know, John, retail comps are different day to day and week to week throughout every year, and, you know, this quarter had its variances, but it's been pretty stable throughout the quarter, relatively.

I think that, you know, the big story here is the 3% total comp.

And I think that I want to make sure that everybody understands that, you know, you've got to focus on the total business.

We're doing business out of the same box with the same labor and the same inventory and so forth.

A lot of retailers have models with multiple businesses, and it is one comp.

So I want to make sure that we focus on the total 3% comp that we achieved in this quarter.

Secondly, can you comment on -- you refer to the new store model continuing to work favorably.

Are there any cost reductions at all in the new box?

Well, in terms of the construction costs itself we continue to work, you know, very hard to deliver our brand and, you know, the quality of the retail environment that our customers have come to expect, but as we build more stores and as we learn more and more we get more efficient at it.

So, you know, we continue to find ways to take costs out of the construction process itself.

What we were really referring to is the sales performance out of those new stores.

They're very productive stores that we've opened in the past few years.

We're very pleased with the performance versus our expectations and it bodes well for the modest expansion in square footage, the increase in square footage expansion that we plan for next year.

Last question.

On A Z commercial, is the Midas hotshot business coming possibly quicker than you might have expected?

Midas is going very well.

We've created a nice partnership with Midas and they're in the process as you know of taking their distribution system and dismantling it and that's what we call the stocking program.

And we're evolving one distribution center at a time, which is good for them and good for us, and we're a couple of distribution centers into it out of eight or nine.

So good progress has been made.

Then, as you pointed out, the hotshot business, which is the daily needs, you know, we deliver that through our A Z commercial programs in our stores.

They were -- Midas was a commercial customer before we entered this agreement and we've deepened that relationship and we're working strongly with the franchisees.

So that business has picked up and we continue to make progress there.

Matthew Fassler you may ask your question.

Please state your company name.

Thanks a lot.

Goldman Sachs, and good afternoon.

Hey, Matt.

Couple of questions.

First of all on the expense side, obviously a terrific showing, and it looks as if you, I guess, exceeded, you know, when you back out the impact of the ITF, with or without it, you kind of exceeded the long-term target that you set for yourself in this fourth quarter.

Can you talk about in a little more depth if you would what you're able to do to take the expense run rate down so sharply?

Presumably while you're investing in Midas-the Midas deal rather and investing in the business.

Well, remember, Matt this, is our seasonal peak quarter, and it is our lowest SG&A to sales ratio throughout the year, and that happens at this time every single year.

Sure.

So we've exceeded our -- in this quarter we exceeded our historical annual numbers but we certainly, you know, have room to go on an annual basis.

You know, the incremental business that we've added through A Z commercial has not required significant investment.

And I think that's a really important story here, that, you know, we have an opportunity to add billions of dollars in sales in a category that's growing at 4 to 5%, that's $48 billion category, and do so without the huge kinds of capital investments that most businesses need to make in order to get into new businesses.

In fact, we leverage the inventory, we leverage the bricks and mortar and the stores, we leverage the bricks and mortar in the distribution centers and so forth.

So this is a very high-return incremental business for us, and that's one of the reasons we're very excited about it.

Gotcha.

Now, if you look forward, and I know you don't like to project, but this quarter, even when you back out the impact of the extra week, your expenses were down year to year nicely in dollars.

As we think about your SG&A line in 2004, the August 2004 fiscal year, should we think about, you know, that magnitude of expense control, or is that probably tough to maintain year after year?

Well, after you adjust for EITF 02-16, which essentially moves some of that vendor funding from SG&A to growth, you have to reset the numbers.

Once you reset the numbers, we've established a new long-term goal for ourselves for SG&A at 30% to sales, which is if you look apples to apples, a more aggressive SG&A goal for ourselves than we have had in the past.

Okay.

Two other kind of technical questions.

You spoke to the impact of EITF on gross margin and SG&A in 2004.

Just in terms of the shift, I guess you talked about 270 basis points.

Is that on top of the 2003 base?

Because I know that there was already some shift underway in the third and fourth quarters.

Or is that on top of levels prior to the initial adoption of EITF 02-16?

That's really the full estimated impact of the EITF, so you would do that to the adjusted numbers, Matt, which is the ones that exclude the EITF impact, then move 270 basis points off.

So basically once you start to cycle the third and fourth quarters of this year where you already had some impact there would probably be less of an adjustment to make?

That's right.

That's correct.

And my final question if you could just give us a sense of what percent of sales were commercial in the quarter compared to a year ago.

What percent of sales in the quarter were commercial versus a year ago?

I think our commercial business is up almost 30% this year, and we've got about a 1.4 share.

I think last year about this time we were saying that we were running about a 1% share.

I'm not sure if that addresses your number.

I guess last year it was around 10% of your business, and it looks like this year it's around 13% of your business.

Are those accurate?

Rough numbers, that's about right, Matt.

Gotcha.

Thank you so much.

Thank you.

Jerry Marks you may ask your question and please state your company name.

Good afternoon.

Raymond James.

Just a couple of quick questions.

The cash flow number that I see here, the 319.659, that's all your cash flow from operations?

Yes, it is.

And then we subtract out Capex, and that should give us a free cash flow number?

Is that the right way?

That's right.

Okay do you guys break out a full balance sheet and cash flow statement or does that just come with the Q?

In this case, it's our year end, it would be in the K, but I think you can pretty much put together a whole balance sheet out of the highlights table.

Just to kind of follow up with Matt's question, I mean, you indicated, Mike, that the EITF, remaining 16 million, would be pretty much spread evenly throughout the quarters but I guess since you already had some in the third and fourth quarter, doesn't it seem like it would be more weighted in the first half?

No, it's done off a projection of vendor funding and when we expect to actually earn it versus when it's actually going to turn into cost of goods.

So it should be roughly evenly throughout the year.

Okay.

And then final question, I mean, with your SG&A initiatives being bumped down to 30%, I presume a lot of that is coming from those hundred ideas that you get every year.

Could you give us an idea in terms of what some of the biggest ideas were that helped drive that in this quarter?

Well, there really are, literally, about a hundred things that we're working on at any one given time, which is the good news, because there are no big hits here in terms of what we've done to drive the continued SG&A improvement, but we continue to have those opportunities.

One of the things we don't do is impact the store labor.

We're very, very cautious to put the right amount of store labor in our stores and the improvements that we've seen have not come from store labor.

We want to make sure that we're meeting our customers' expectations day in and day out.

But there's lots of projects in IT and throughout the supply chain, throughout our store support center and so forth, new contracts that we negotiate with various non-product vendors that continue to drive costs down as we continue to experience the natural cost increases in other parts of our business, including salaries in the stores.

So we've been very, very pleased with our ability to control spending and control those costs, but we continue to make that part of our culture, and we have opportunities to do that going forward.

Okay.

Thanks.

Thanks, Jerry.

Greg Mallick, you may state your question, and please state your company name.

It's Greg Mallick from Morgan Stanley.

I apologize if you already went through this because I got cut off during the call.

On the gross margin could you give some more expansion on what actually was driving that increase?

The commercial business was driving the growth, which I think we assume is lower margin, maybe it wasn't, and also maybe quantify how much of that could be foreign sourcing or alternative sourcing and also some of the vendors securitization program that you're doing.

Have you seen most of that impact or is there still more to go in terms of helping the gross margin or helping the working capital vis-a-vis the gross margin?

Okay.

So in the quarter if you look at the improvement that we had in gross we had about 190 basis points of an improvement.

Of that improvement 161 was related to the accounting pronouncement that moved the vendor funding up.

The remaining amount was about 29 basis points that was left.

That was really the continued focus on category management.

And as you know, Greg, category management really reflects everything, including our good, better, best initiatives, making sure we're finding and filling holes in our inventory where necessary, adjusting prices where that's appropriate, and what we've been able to do is leverage our supply chain and do all of these kinds of things on the DIY side of our business that's been able to more than offset any dilution that we've gotten from the A Z commercial business.

So we've had great success doing that.

We continue to expect to be able to execute and improve our gross margins into the future so we're not yet done, and on your piece about overseas that remains to be an opportunity for us going forward, we have to date not directly imported a lot of the products.

So we still have opportunity to go overseas and buy directly.

You know, and even though A Z commercial business is a little dilutive on the growth in some aspects of it, it actually helps us put more volume through our supply chains and through our stores, so, therefore, as we're looking at the supply chain costs as we grow, scale on either business, the DIY or the A Z commercial business, we're getting leverage to the supply chain, and that's helping the cost structure, which also shows up in gross.

So we're very pleased with the incrementality of that business and the ability as we grow that business for it to bring us dividends in a lot of areas on the P & L.

Okay.

Great.

Thanks.

Thanks, Greg.

Again, at this time, if you would like to ask a question please press star 1 on your touch-tone phone.

Again, that's star 1 to ask a question.

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

Advest.

Couple of quick questions.

On the pay on scan initiative, if you can give us a little bit more color as to given the facts the product won't show in inventory, if you can give us a little bit more update of the adoption of the vendors to pay on scan.

We introduced pay on scan, you know, the theory of it, and our program to our vendors.

The purpose of pay on scan is to really focus the vendors on selling through the register to our customers.

In other words, now without pay on scan, the vendor counts the sale when they load our warehouse.

So their entire focus is on trying to get their product into our warehouse.

Through category management, what we want to do is we want the focus on growing the business and improving on that sale to the end customer.

Remember, there's $60 billion worth of undone maintenance every single year and we are trying to get our vendors to focus on leading the customers to buy more to advertise their brands and so forth.

We have been successful with the pay on scan initiative.

We have vendors signed up and going on the initiative.

At this point we have not taken that inventory off of our balance sheet, you know, in any material way.

So, you know, what you see right now is really not impacted significantly on the balance sheet by pay on scan.

As we go forward and have the opportunity to begin to take that inventory off our balance sheet, you know, we'll be sure and apprise you of the results.

Also, a question on the commercial side, do you have accounts receivable number for the commercial business?

Yeah.

Actually, let me just see.

We don't have a specific accounts receivable number.

We actually discount a good portion of our accounts receivable, as you know, Bret, when we actually factor them off of the banking facility to the tune of about $30 million, which we've disclosed in the past.

That number is about the same.

Yeah.

And then the 539 cash flow number you referenced, what was the comparable number in the prior year?

I think that was including the improvement from working capital.

Okay.

I'm sorry, Brett, I don't have the comparable number here in front of me but I can work it out with you if you'd like if we contact you after this.

And then one last quick housekeeping.

Projected Capex for next year?

Again, we're targeting the opening of about 195 stores, and that's up from about 160 stores this year, so you can see the vast majority of our Capex is related to our new store opening program, then we've got some modest store maintenance Capex.

No other major capital projects, though?

Nothing at this time.

Thank you.

Reed Anderson you may ask your question and please state your company name.

Piper Jaffray, good afternoon.

Most of my questions have been answered.

Just a couple of quick ones here.

Back to comps.

Would you characterize the comp increase as being more traffic-driven or ticket-driven?

Give us kind of a flavor for that, please.

Well, the total comp is driven, you know, by A Z commercial as well as retail and so it is a balance here as we've been able to attract new A Z commercial customers on the DIY side the DIY increase has been a balance as well.

We've been very gratified by the development of our comps this year.

As we drove that huge spike in fiscal 2002 we brought a lot of new customers in, and as you know, when businesses do that, you know, there's no guarantee that those customers ever come back, and I think that it's a tribute to AutoZone's terrific business model and the service that our AutoZoners provide every single day that those customers have come back and we're building on that business now.

One other one.

Steve, in your prepared remarks you commented about proprietary AutoZone brands being I think somewhere in the neighborhood of 50% of your sales.

I was curious if that is the number and what would that number look like a year ago?

I think that that number is -- we're characterizing it as more than half of our sales, and it was a little more than half of our sales last year as well.

What I was talking about is that our focus over the coming year is going to continue to be to focus on the Duralast and Value Craft names.

That in addition to AutoZone- those three are our proprietary brands.

As we look forward we have an opportunity with those brands to develop them further, particularly on the good, better, and best hard parts development.

As we continue to improve the quality and the development of those brands, it really becomes an exclusivity, you know, thing for AutoZone, where customers can only get those brands in our AutoZone stores.

So we're excited about this initiative going forward.

Great.

Thank you.

Sid Wilson you may ask your question, and please state your company name.

Sid Wilson, Whitaker Securities.

One question can you give us an idea in terms of you mentioned that you're going to be opening a couple of stores.

What's your square footage growth from the commercial standpoint?

In other words, what your commercial growth will be.

If you said that, I apologize, I didn't hear it earlier.

For next year.

We did not say that.

We don't give specific guidance on sales and income going forward, but we have tremendous amount of opportunity for growth in the A Z commercial business.

We're only in 1,942 of our 3,219 stores.

We have the ability to add the A Z commercial program into far more stores than we're currently in, and we will continue to do that as we add chain customers, and we need to line up business with those chain customers.

And when we open a new program, you know, that's across the street from our chain customers, those programs open up very profitable and very successful.

So we have the ability to continue to open up programs going forward in order to help drive our share from the current 1.4% level.

Okay.

And can you tell us what percentage of your stores have already been refurbished and what your plans are in 2004 in terms of store refurbishing?

I think we've characterized the refurbishment as a-a real fairly-in the whole scheme of things a fairly modest effort as we're trying to go back through our 10-year-old and older stores and make sure that the basics are done that, the stores are painted, the pylons are replaced, counters, tile, things like that, so to some extent it's general maintenance.

We've done a few hundred stores so far and we will continue at a pace that's manageable like that for the next few years.

Okay.

My last question is, can you give us a breakdown of what percentage of advertising is going towards TV versus radio?

Well, in the past few years, it's been largely radio that has carried the get in the zone campaign.

In this past quarter, we're very excited about the addition of television, which has tested out earlier in the year to add significantly to the reach and the frequency and the effectiveness of the campaign.

So we have an opportunity to add television as a bigger part of the mix going forward in addition to our radio, which continues to perform well.

I think we've got time for just about one more question.

Thank you.

John Lawrence, you may ask your question and please state your company name.

Yes, Morgan Keegan.

Can you comment at all on how well field link -- how many vendors are signed up on Via link at this point?

Good question.

Via link is a third-party provider which allows us to provide data back and forth real time with our vendors for the pay on scan initiative, and it gives complete visibility to inventory by SKU and where the inventory is and flow of payments and so forth.

So we haven't disclosed at this point who is signed up and who is involved with that, but it completes all the technical capabilities so that a vendor doesn't have to invest anything in their IT systems in order to fully engage in pay on scan.

So that's the purpose of the Via link program with our vendors.

Thanks.

Okay.

Well, we appreciate everybody joining us today.

That really concludes our questions.

Thanks very much for participating in the call.

Thank you.

That concludes today's conference call.

You may disconnect at this time.