汽車地帶 (AZO) 2004 Q3 法說會逐字稿

This is the conference call to discuss AutoZone's third quarter fiscal 2004 financial results.

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

The conference call will end promptly at 10:00 a.m. central time, 11:00 a.m. eastern time.

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

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 prospects of war including terrorist activity and availability of commercial transportation.

Please refer to the risk factor section of the Form 10(K) for the FY ended August 30, 2003, 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 a reconciliation of these metrics please see AutoZone's press release at the Investor Relations section at www.autoZoneInc.com.

Mr. Odland you may begin.

Thank you and thanks to everyone for joining us today for AutoZone's third quarter fiscal 2004 conference call.

With me today are Mike Archbold, AutoZone Senior Vice President and Chief Financial Officer, and Brian Campbell, our Director of Investor Relations.

I hope you've had an opportunity to read our press release and learn about this quarter’s results.

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

Just click on the Investor Relations tab to see them.

We are pleased to report another record quarter in this third quarter of fiscal 2004.

This quarter continued our trend of record sales, record EBIT, and record earnings per share.

All of these metrics are at their highest level since AutoZone became a public company in 1991.

This quarter we reported a 2% comparable sales increase and a 29% increase in EPS, following a 36% increase in EPS last year.

For the twelve-week quarter we reported sales of $1.36 billion, an increase of 5.6% from the third quarter ended May 10 of 2003.

Same store sales or sales for domestic stores open at least a year were up 2% in the quarter including a 1% retail same store sales and 10% for commercial same store sales.

Gross profit as a percentage of sales for the quarter improved by 3.2 percentage points while operating expenses as a percentage of sales increased by 2.0 percentage points.

This resulted in an operating margin of 18.5%, up 1.3 percentage points from last year.

Operating profit increased 13.3% over the prior year.

Net income for the quarter increased by 13.8% to $143.4 million, and diluted earnings per share increased 29.4% to $1.68 from $1.30 in the year ago quarter.

Our strong earnings growth and our disciplined capital management resulted in another record return on invested capital for the trailing four quarters, up 25.1%.

Every dollar invested in the business at AutoZone easily exceeds it's cost of capital creating a wonderful competitive advantage.

We are very proud to tell our shareholders that their investment in AutoZone will be wisely managed.

Now I'd like to begin by talking about DIY, or retail sales.

For the quarter total retail sales were up 4.4% while same store sales were up 1%.

This increase, while not up to our full ability, reflects a positive trend for our business.

Last quarter in our conference call I told you how our company began implementing growth initiatives that once in place would hold promise for us and we knew we'd have to drive foot traffic in the quarter which had been soft during the winter months.

So we launched our spring marketing and merchandising efforts to start the season during this past quarter.

Finally, I discussed last quarter that our inventory levels were too low to service the business adequately and I'm encouraged to report that we've begun to put late model parts inventory into the stores.

This is our core business and we will continue to drive to reinvigorate store traffic.

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

So, what were some of our successes this quarter?

First of all I need to point out that the things that I am going to cover just got started in this quarter and will continue to be rolled out over the coming quarters as well.

First is our store refresh program.

Last quarter we remodeled 81 locations.

These remodels continued to deliver results as required for pay out as investment is minimal and the customer feedback has been very positive.

I want to reiterate here that we will work as quickly as possible in rolling out the remodels so long as these efforts don't disrupt the store operations during what is now our busiest selling season.

We expect to remodel about 80 more stores in the fourth quarter.

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

Along with our ongoing radio campaign we utilized television to reach a wider customer base and we continued to see positive results from that.

With our messaging around regular vehicle maintenance and we will continue to take advantage of the seasonal ramping up of our business.

Last quarter I mentioned how we were testing just over 100 programs throughout the company.

These programs focus on the basics, service, availability of parts, merchandising and advertising.

Most of these projects were developed and are in various stages of implementation right now.

For example, our private label product introduction, the new arrival, product placement optimization and quick replacement of new products into our stores.

The results began to be realized here in the past quarter, but are expected to extend through to the fall.

Our total inventory defined as GAAP inventory plus Pay-on-Scan inventory added back per store is getting back to appropriate levels.

We feel it's going to take us a quarter or two for us to achieve our desired level.

We believe the appropriate level inventory per store short term is about $480,000 per store versus this quarter’s $465,000 per store.

Further we will continue to invest in inventory that exceeds our 15% IRR hurdle rate.

Our continued focus in marketing opportunities towards our younger customers especially with regards to making our stores a cool place to shop has continued to show favorable results.

Jessie James of Discovery Channel's Monster Garage television show has helped us to convey this message in our advertising this quarter.

The NASCAR title sponsorship of the AutoZone NASCAR Elite racing series has created a strong cross-selling merchandise opportunity.

This series covers 51 races and includes over 250 driving teams today, a great opportunity to reach a dedicated audience of DIYers and those fans that follow the sport.

As the country’s second most watched sport, NASCAR offers a wonderful opportunity for us to attract new customers to our stores.

Today we offer coupon book discounts to race goers in order to test bounce back of buying habits back at our store, and preliminary results have been encouraging.

We continue to track results and roll-out our programs throughout the 40 races yet to be run in the season.

More recent initiatives include the introduction of the truck zone area of our stores.

We now have truck zone in about 400 stores and ultimately anticipate the majority of our stores to benefit from this new merchandising effort.

We also continued our strategy of establishing good, better, and best delineation for most hard parts categories.

For instance this past quarter we introduced Value Craft drums and rotors and a new line of Value Craft belts.

These additions help fill a gap in coverage that we've had in our good category or the entry level category within their segments.

We expect to continue next quarter and the quarter after rolling out these opening price point items throughout multiple categories.

Additionally this past quarter we added a new line of proprietary branded Duralast Gold friction products to fill up the best category line in friction.

This is one more example of our relentlessly creating the most exciting zone.

The impact will be felt into the fourth quarter of this year and into F 2005.

We will continue to expand -- to extend our Value Craft and Duralast brands over time.

Our proprietary brands now represent the majority of our sales making AutoZone the exclusive place to get some of the most recognized brands in our business.

We've also expanded the Duralast tool line in the stores.

These are professional grade hand tools that are currently being marketed to DIYers.

We started this line around Christmas time with only 15 SKUs and today have now over 170 SKUs in the average store sets.

So by doing this we are offering a premium product to help drive same store sales in this category while improving gross margin and satisfying our customer needs.

We also expanded the number of vendors doing business with us on Pay-On-Scan.

At the end of the third quarter we now have $61 million in inventory on Pay-On-Scan on our way to about $200 million by the end of next quarter.

And Mike Archbold will take you through more on our successes in this area later in our discussion.

For the trailing four quarters sales per square foot were up 1% to $265 per square foot and it continued to set the pace for the rest of the industry.

New store productivity continues to improve.

We opened 38 stores in the quarter and we now have 3,337 stores in the United States.

We also acquired the assets of a regional auto parts chain based out of Philadelphia called AVC Auto Parts.

This asset purchase of 12 stores represents an exciting step for us.

We've been saying that we are going to look to do tuck in acquisitions where they make sense and if we looking to open new stores in this particular area and an established competitor is willing to sell his or her location we would be willing to listen.

This was a fast and advantages way for us to become established in this particular area of the country.

We may continue to take advantage of opportunities like this as we go forward.

Year to date we've opened 118 new stores on our way to our planned opening of 195 new stores by the end of next quarter.

In summary we've begun implementation of many new initiatives only part of which began to impact sales in the third quarter.

Our store base is older than our competitors on average with our average store being just over eight years old.

We believe that if our store base was just three years younger our same store sales would average 5 points higher than they currently do.

Stated differently our stores that are the same age as our competitors are comping exactly the same but these stores naturally have significantly less cash-flow than our older stores.

That's why we need to think about our mix of stores differently.

Overall they produce a naturally lower comp but much, much better financial returns.

Also some of the our competitors have indicated that our comp store increases were driven in large part by their nonauto parts business most of those items which we don't carry.

While we made some progress in the past quarter, we intend to continue to focus intensely on profitably growing our DIY comps in the coming quarters.

Now turning to our commercial business.

For the quarter the total commercial sales were up 11.5% from last year, and same the store sales increased 10% on top of the 30% growth from the previous year’s quarter.

This marks our 15th consecutive quarter of double-digit growth in the commercial area.

We now have commercial programs in 2,199 stores supported by 117 hubs.

This is a higher store count with commercial programs than last quarter as we have expanded the program to an additional 151 stores.

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

We will continue to focus on the commercial program and we continue to have success developing our sales force, developing customers around existing stores, adding new and local chain accounts and implementing our new hub stores.

This high growth rate in commercial is achieved in the same stores as DIY and hence you need to look at the total comp to really get an accurate view of the business at AutoZone.

This quarter’s commercial results were consistent with last quarter’s.

So with the Midas conversion behind us, the team is building the business for the future.

Focusing on proper inventory and service levels we are placing greater emphasis on having more late model products in our inventory mix, increasing the store count, servicing our customers and increasing the skill sets of our sales force.

Still with only about 1.5% of the commercial sectors’ business AutoZone has significant opportunity to gain market share.

We are growing significantly faster than the market and we have considerable untapped potential.

We have the opportunity to add more late model parts to fill in the gaps in our lines while still managing overall inventory levels.

This sector is highly fragmented and we are ready the third largest player, so in an industry that the Automotive Aftermarket Industry Association, or the AAIA, states it is about $48 billion in size and growing about 4% a year.

We are confident that our model can continue to grow and add shareholder value over time.

So we are very excited about the future of the commercial business at AutoZone and it's our number two growth priority.

Our Mexico stores continued to do well in the quarter even with the continued peso fluctuations and the economic volatility there.

We opened five stores during the quarter which now gives us 60 stores in Mexico compared with the 3,337 in the U.S.

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

Gross margin for the quarter was 49.7% of sales, up 3.2 percentage points from the prior year.

In order to make a fair comparison with last year's results we have attached an adjusted income statement to the press release.

Adjusting both this year's and last year's quarters for the effect of the implementation of EITF Issue 0216 as well as the one time warranty impact, comparable gross margins were 46.4% versus 45.5% last year.

So the .95 percentage point increase in growth was directly attributable to our continued category management efforts.

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

This effort includes five key initiatives, tailoring the merchandising mix by store, the continued implementation of our good, better, and best product line which allows pricing to different customer needs as well as the ability to manage gross margin.

We continue on our multi-year effort to move warranty liability up the supply chain to our vendors where their costs are lower than our costs.

So this is a much more efficient way of doing it for the industry, and it de-risks AutoZone's liability.

This quarter’s efforts resulted in pretax gain to operating profits of $10.6 million as we relieved AutoZone of that future liability and lowered the risk level and we expect continued future opportunities.

Excluding the one time warranty benefit we still increased gross margin by .95 percentage points.

We believe that there's some margin expansion opportunities still available, albeit, at a slow pace than we've had in the previous couple of years.

Those efforts have been in the fore front in our industry and we feel we continue to have opportunities to work with our vendors to lower cost and to provide the best select of merchandise for our customers at the right prices.

Now turning to SG&A.

Our expenses for the quarter were at 31.2 percent of sales, up 2.0 percentage points from last year.

Excluding the adjustments for credits previously recognized in SG&A and now reported in the cost of goods, along with the exclusion of last year's one time gain in the sale of Truck Pro, SG&A was 28.7 percent of sales, versus 28.4% last year.

So this was up 30 basis points from a year ago.

This was due to the one time expenditures related primarily to the refreshing of the 81 stores that we talked about earlier as well as the cost of opening new stores and an additional 151 commercial programs.

As we said we'll continue to refresh the stores during periods when it's not disruptive to regular store operation.

So we expect to see the benefits of these programs over the coming quarters.

Excluding the retro fits and the commercial program openings we leveraged store -- leveraged expenses in the quarter.

At the Store Support Center we gained leverage from controlling staffing, salaries and IT spending and we've also been managing our retirement medical and insurance costs on an ongoing basis.

Store payroll and full time, part-time ratios have continually been managed appropriately to reflect the seasonal demands of our business.

We believe that our payroll spending and our part-time and full-time balance are at appropriate levels.

Advertising costs were up versus last year as our advertising reach and frequency continues to increase and we continue to roll-out our television campaign in the quarter.

Our gross advertising outlays will increase in the fourth quarter to drive sales but we expect vendor support to neutralize any negative impact to operating profit.

The EBIT for the quarter was $251 million up 13.3%, and with the ability to grow profitably we continue to see possibilities to improve our gross margin and SG&A as a percent of sales in the future.

Interest expense for the quarter was $21.9 million compared to $19.4 million a year ago.

Debt outstanding at the end of the quarter was 1.799 billion, versus $1.42 billion last year and this is consistent with last quarter’s level of $1.787 billion.

Over the quarter our debt levels were maintained in line with our guide of 2.1 times our trailing twelve-month EBITDAR.

We are very pleased with our ability in the last quarter to lock in rates at historically low levels.

We generate far more cash-flow than capital expenditure needs and discriminately issued debt to appropriately manage our capital structure; balancing the more expensive equity component with the historical inexpensive debt.

We have purposely managed our capital structure relative to our cash-flow in order to maintain our credit rating at investment grade but also lower our total cost of capital.

For the quarter our tax rate was 37.5%, down from 37.8% last year, and we expect to be able to run at about the 37.5% rate for the rest of this fiscal year.

Net income for the quarter was $143.4 million, up 13.8% over the prior year, and earnings per share for the quarter were $1.68, up 29.4% on 85.2 million diluted shares.

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

Mike?

Thanks, Steve.

In this part quarter AutoZone generated $170 million of operating cash-flow and bought back 1.6 million shares for a purchase amount of $133 million.

We also continued to focus on return on invested capital.

For the third quarter of this year we reported yet another improvement on a trailing twelve-month basis to 25.1%, up from last quarter’s 24.5%.

Our focus on ROIC, underscores our beliefs that it and EPS growth are the best indicators of the creation of shareholder value over the long-term.

Turning to some of the balance sheet highlights, gross inventory which again is defined as our total inventory excluding Pay-On-Scan inventory, was up slightly versus the prior year, while our overall sales grew at 6%.

Our gross inventory per store is now down to 447,000, versus last year's 469,000.

Our net inventory per store was reduced even more from 128,000, down to 82,000 per store.

Net inventory actually decreased by over 32% this quarter, versus the same time last year.

Additionally we improved our net inventory turns in the quarter to 11.6 times from 7.6 times last year.

Accounts payable as a percentage of the gross inventory increased to 82% from 73% last year.

Finally I will again reiterate our goal which is to achieve 100% accounts payable to inventory over time.

Our total working capital was down almost $44 million from the year ago levels to a negative $9 million.

So we have totally removed the working capital from this business.

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

Additionally we continue to work on programs to reduce our vendors’ cost of borrowing as well as to continue to develop our new Pay-On-Scan initiative.

The Pay-On-Scan program was introduced to our vendors last year.

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

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

Last quarter we announced we had achieved approval from the SEC on the proper handling of inventory on Pay-On-Scan and that we had signed up vendors representing millions of dollars in inventory potential.

This quarter we reached $61 million of inventory on Pay-On-Scan, or POS as we're calling it, and removed it from our balance sheet.

We are going to be using a couple of new terms to describe our inventory levels going forward.

Just to make sure we are all grounded in that, total inventory will be used to define our GAAP inventory plus our Pay-On-Scan inventory being added back.

Gross inventory will be used to define the total inventory as reflected on the balance sheet which excludes Pay-On-Scan inventory.

So to reiterate, the gross inventory is the number that's in the GAAP financial statements.

For the quarter Pay-On_Scan inventory represented a 3.9% reduction in our total inventory.

Total inventory would have been 465,000 per store versus the reported 447,000 per store.

Most importantly for AutoZone these same vendors represent several hundred million dollars of inventory which we expect to convert to POS inventory over time.

As we continue to add innovative merchandise and parts coverage we expect to increase our per store total inventory level to approximately 480,000 over the short term, which includes the off balance sheet POS inventory.

Net fixed assets -- in terms of other highlights on the balance sheet, turning to net fixed assets -- they were up 4.8% versus last year.

Capital expenditures for the quarter totaled $43 million.

Depreciation and amortization totaled $24 million for the quarter, which was up slightly, primarily driven by the procurement of land and the additional expenditures required to open 43 new stores this quarter, complete the 81 store refreshes, and work on-site developments for the upcoming quarter.

Looking at our debt levels our debt at the end of the quarter was 1.799 billion, an increase of $12 million from the last quarter due to the additional debt capacity afforded by the increased cash-flow.

We continue to manage the adjusted debt, which includes our leases, to roughly a guide of 2.1 times EBITDA.

With these trends our EBITDA coverage, or EBITDA to interest coverage, is now 12.1 times on a trailing twelve-month basis compared with 11.8 times last year.

We've been very pleased with our success that is showing $1 billion of debt over the past 18 months at a weighted average effective annual interest rate of 5.3%.

Further, in the last quarter we entered into hedging transactions which lock in the interest rate for an upcoming $300 million five-year note at an estimated rate of approximately 4.3%.

As of May 8, 2004, AutoZone continues to be one of the few players in our industry to have an investment grade debt rating.

Our senior unsecured debt rating from Standard & Poor's is BBB plus with a commercial paper rating of A2.

Moody's Investor Service has assigned us a senior unsecured debt credit rating of BAA2 and a commercial paper rating of P2.

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

Shareholders equity, going down the balance sheet, declined reflecting the repurchase of our common stock over the past four quarters.

Our return on equity to the trailing four quarters was 131%, versus 71% in the quarter last year.

Our financial model is strong.

We have continued to increase earnings and cash-flow while simultaneously increasing our business model by removing risks associated with interest rate fluctuations as well as the warranty risk.

Now a I'll turn it back to Steve.

Thank you, Mike.

Our business model performs well as we've said before in both strong and weak economies.

Last quarter I said that our sales results in the previous quarter had been disappointing.

We had not driven incremental store traffic in that quarter and we had not delivered the results that we wanted to deliver.

This quarter we made some headway in rolling our initiatives but we need to continue to make progress over the next couple of quarters.

We believe that we've got many initiatives that will help to us continue to grow same store sales over time.

But we budget very conservatively to insure that we maintain our expense discipline and insure that we deliver solid returns.

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

It leverages our infrastructure, drives incremental EBIT dollars with very little incremental investment and will be accretive to our current historic high ROIC of 25.1%.

We continue to have opportunities to expand gross margin over time, driven by supply chain efficiencies, mix of business and improved pricing.

Additionally new programs like Pay-On-Scan will help to create a stronger vendor focus on sales.

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

Repurchasing stock is a key tool in managing our capital structure and we can continue to repurchase to 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.

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

But we are going to work every day to deliver our best results for our shareholders.

We are proud that we continue to demonstrate industry leading financial results.

Being an extremely disciplined financial planning company we have proven our ability to manage costs appropriately and spend our shareholders’ money on incremental projects that only that could exceed our standard 15% after tax hurdle rate.

We've just begun all of our efforts and we are focused on operating this company to profitably grow sales, efficiency deploy capital and maximize long-term shareholder value while maintaining the highest level of ethics.

Now I would like to open up the call for questions.

Thank you. [Caller Instructions].

Your first question comes from Matthew Fassler with Goldman Sachs.

You may ask your question.

Thanks a lot and good morning.

Good morning Matt.

A couple questions I'd like to ask.

First of all, you talked about the refresh program which you are starting to roll-out with a little more frequency.

Can you talk about the kind of investment that you make in that program both on the capital side and the expense side and the kind of comp response that you've seen from stores that you've refreshed?

Yes.

Our refresh program is relatively modest versus most retailers.

I think in most cases retailers have to put millions of dollars in the stores every seven to eight years.

In our case we are dealing with stores that are ten to 20 years old and our refresh tends to be more of replacement of counters and tile and painting and fixing up the store.

So a lot of people would count that as maintenance.

So really the cost of these things -- while we haven't given a specific number -- the cost is relatively modest and we've said that it's a couple percentage points increase in our capital budget over time and there is some labor with that to implement the program.

What kind of [inaudible]

While most companies would view this as simple maintenance of stores.

We are actually pleased that we are getting enough lift to pay this out as we go forward.

Can you tell us what kind of lift you're getting.

Enough to pay it out and be pleased with the results but we haven't set a specific number, no.

My second question, I'm looking at the commercial sales growth.

And this quarter I believe you added 151 stores to the commercial program.

So the -- I think you have a double-digit increase year to year if you look at the trailing four quarter additions to the program.

Can you talk about what that's contributing to your commercial comp?

And if you can give us a sense for the like-for-like commercial performance for those stores that have been part of the program for some time?

When we say that we open a commercial program what we mean by that is we take a store that was DIY or retail only and we add a commercial specialist to that store with the appropriate equipment and we begin to develop commercial sales in the garages and the customers’ chain accounts around those stores.

We did open a number of new programs this quarter which remember that flows over the quarter and many of which were towards the end of the quarter so the impact will be felt in later quarters.

We are really very pleased with this commercial business. 15 straight quarters of double-digit growth here in growth in market share.

And I think it was a tremendous effort to swallow the Midas business and I think what people have to remember is we have about 3300, 3400 stores and Midas has about 1600 or 1700 stores.

So we increased the number of deliveries per week by 50% without any ripple to our supply chain and our business and we actually improved the service levels on their business.

So that's the kind of effort we are putting behind the commercial business and we are very pleased with the results.

And my final question, obviously you have a lot of moving pieces between refresh, advertising, et cetera, and comparisons moving around.

Any kind of sense as to how the business shaped up over the course of the quarter?

The business goes up and down depending on any individual market, the weather, how certain programs are working.

So we haven't seen any trends here that we could point to.

To make progress here, we are 200 basis points better in the comp than we have been.

We are pleased with that.

We need to make more progress.

And as we roll-out these programs, remember, they didn't all just roll-out all at the same time at the beginning of this past quarter.

They started to roll-out in this quarter and they will continue to roll-out in subsequent quarters.

So we are working very hard to improve the comp from here.

Gotcha.

Thank you.

Thank you.

Bill Sims with Smith Barney, you may ask your question.

Good morning, thank you.

Good morning, Bill.

I have just two or three questions.

The first one is a general question to you, Steve.

How would you define yourself as a company today versus previously, let's say a year ago?

Do you still characterize yourself as a top line growth story or should investors start to focus more on the margin and stock buy back opportunities as the main drivers of growth going forward.

Bill that's a good question because – and I don't see any difference in our story today than where it was a year ago or two years ago.

I think we are a growth story.

We have thousands more stores that we can build on the DIY side.

We've got sales per square foot up to the highest levels in our industry at $265 a square foot but we think that we can go to levels higher than that.

We think there's billions of dollars of business we can add in the commercial side.

And then there's Mexico.

And we believe there's a tremendous amount of growth in this business available to us for the foreseeable future.

But here we have a business, it's about $5.5 billion in sales with over $1 billion in EBITDA.

With modest capital needs we said about $250 million a year that produces tremendous cash-flow.

So the story that I'm trying to add to this growth story is how people focus on what a cash machine this business is and how much shareholder value can be added through the share buybacks.

I think we've -- if you look at what the share buybacks have contributed to our business over the past year, we've driven eight to 10% EPS growth simply on the share buybacks without any income growth and clearly there's sales and income growth on top of that.

So, I think if I was an investor in this business I would look at it both from the sales opportunity standpoint as well as the tremendous value that can be created through the redeployment of that cash cash-flow.

Okay, my second question is a follow up from the last question on the store fresh effort.

I believe you said you refreshed 81 locations during the quarter.

If And if I'm not mistaken at the end of last quarter I thought you said you refreshed close to 200.

What changed during the quarter to lead to you only refresh 81 locations?

And if the stores are getting older and it is impeding your comp performance why aren’t you refreshing them quicker?

What we said last quarter is that we would be doing about 200 for the year and we did 81 in the last quarter.

We are going to do about another 80 in this quarter and I think there was about 40 or 50, round numbers, that we had done before that.

So nothing has changed on that, Bill.

We continue to through the refresh.

We continue to look at the thousands or so stores in particular that are ten to 20 years old and clean them up, make them look as good as new and we are rolling this through.

So we are very pleased with the results.

Last question and then get one administrative follow up.

What percent of your debt fixed versus floating?

And what do you anticipate being the impact if any as interest rates rise?

Okay.

Actually as we talked about we've locked in over the last 18 months almost $1 billion worth of our debt so the vast majority in the 80, 90% of our debt -- balance sheet debt -- is actually in the fixed category.

So we are actually at this point highly desensitive to any interest rate fluctuations.

Thank you.

One last follow up for you, Mike, can we talk about a sustainable tax rate going forward beyond this year?

Are we going to go back to 37.8% or is 37.5 sustainable?

We haven't given any specific guidance on that but what I would say is to look at the 37.5 we believe that's the appropriate rate for an entire full fiscal year and at this point we don't see any changes in statutory rates so that looks like the rate from what we can see at this point.

Thank you.

Your next question comes from David Schick with Legg Mason.

You may ask your question, sir.

Good morning.

Hi Dave.

A couple of questions.

You talked about a number of initiatives to drive traffic and that you were starting to see some response to that in the quarter.

Could you break out what traffic alone grew out traffic versus ticket if you could do that for us?

The predominance in growth still continues to be in the ticket side and our opportunity continues to be on traffic side.

Many of the things that we've begun to introduce into our stores are slow rolls and we've introduced the Duralast Gold friction program.

We are introducing our Value Craft drums and rotors and belts, the Duralast tools.

But these are things that we are adding to incrementally and we will continue to roll-out over the next few quarters.

I believe if you look at some of the innovative products that we've introduced during the quarter there's always new stuff.

You go into our stores today we now have wheel covers that are lighted wheel covers so at night when you see these things they are great, it looks like the wheels are on fire as they are driving down the road.

We have got things – the miniature motorized motorcycle products that are called pocket rockets which are a lot of fun.

So we have got a lot of things that are coming down the road, only some of which have hit this quarter and the roll-outs will continue over the next couple of quarters.

Clearly we've got to focus on our top line and continue to grow our top line going forward.

So was traffic down at the DIY side over the quarter year over year?

No, I'm not sure that it was down.

It just wasn't up where we want it to be.

Okay.

If you could talk a different way of slicing perhaps the commercial business, on the comp stores, could you talk about how much of that is new accounts at a comp stores versus organic growth of an existing account?

When we talk about comps on the commercial side we are talking about comps in DIY same store for one thing.

The growth in our commercial comps in total, because there are not a lot difference, is driven by both the chain accounts as well as the up and down the street accounts.

So we are building, and then in terms of existing versus new customers, we are seeing growth in both, saw growth in existing customers as well as the addition of new customers.

The balance is going to be there across up and down the street, chain and above with new and old.

And I really like that balance because it demonstrates a very healthy business.

And that's how we see it going forward.

Last question.

Could you break out or maybe it wasn't material yet, how much some of the shift to Duralast and other growth in proprietary product is driving gross margin?

You know, that's a real good question because people look at the gross margin and I know that some people worry about whether we are taking prices up and so forth.

I think what we have said before and I continue to focus on is when you don't have that entry level line or in our case our Value Craft product then what we had to do is to take the better and best ranges and bring them way down in pricing versus where they should be.

When we introduce the third line or the entry level line we can hit the price points for the value oriented customer and then appropriately price the better and the best and therefore get some margin blending.

And that's what we refer to in all of our category management initiatives.

So we actually are driving a better value perception in the stores and better range of appropriate products for those customers who are interested in it while at the same time driving some improvement on the gross margin.

So outside of accounting and warranty is that the prime driver of gross margin expansion, that phenomena right now.

Exactly.

Thanks.

Alan Rifkin with Lehman Brothers.

You may ask your question.

I have got a couple of questions surrounding advertising, Steve.

What was the impact of the incremental advertising to your SG&A?

I know that you mentioned that going forward as you continue to roll-out the TV ad campaign we will continue to see advertising up.

Can you maybe provide some sort of a quantification there?

And then with advertising, I believe certainly having greater elasticity on the consumable part of the equation, are you satisfied thus far into the program with the receptiveness that the advertising has given you on that side of the equation?

Let me start with the effectiveness of the advertising.

We track our advertising and model the impact of it quantitatively on our sales and we are able to look at radio, we are able to look at television discreetly and so forth.

We are actually able to look at it by piece of creative and we've been very pleased with the results that advertising has on this business.

Our business has shown, and I think it spills over to the entire category by the way, Alan.

But our business continue to show elasticity to advertising both in television and in radio because you are reminding people to do that maintenance that goes undone each year as you know in this category.

So a lot of this maintenance gets deferred and we have to continue to remind people to do that.

So we did increase advertising in the quarter.

It's largely offset by vendor funding and we believe that we are going to continue to do that in the fourth quarter as well.

Then on the quantification, Alan, clearly we did say that last quarter as we were investing in television that television was incremental TRPs and therefore incremental dollars that we were going to be spending in this quarter and we did in fact do that.

So in and of itself that is a piece of what drives up the SG&A.

But as Steve said we hold the advertising to the same kind of standards and ROI return so we are getting the sales return on that incremental spend so we are driving incremental improvement from it as well.

Thank you.

John Lawrence with Morgan Keegan.

You may ask your question.

Good morning.

Good morning John.

Steve, would you just comment a little bit on, talk about the inventory mix a little bit now that we are going to get some more late model parts in, what does that do for you?

Do you think that that's cost you on the comp and just discuss that, please?

Yeah, John, it continues to be a challenge in this industry.

Because there's over 500 models that are introduced by the manufacturers every year.

So every year in October we've got 500 new models and all the parts to deal with and add.

So we have traditionally focused on the DIY customer, which is invested in the OKVs or the seven-year and older cars.

As we've grown our commercial business we found that we need to have parts that are geared toward the newer vehicle and so we've begun over the past year or so to add more new parts.

In general we are still behind on this thing, and you know, these parts take a awhile to add to source and manufacture and get through our supply chain and we need to do a better job of getting the newer parts in the stores.

I think as we do that over the coming quarters we are going to see a lift in the sales obviously of those parts but also we are going to do a better job of taking care of our customers.

Secondly would you comment since the quarter end with the ad spending and everything that you are doing trends stay about the same as we start the fourth quarter?

I prefer not to talk about this quarter but it's brand new, we are a couple weeks into it.

Clearly we have opportunities here to continue to roll the kind of programs that we've talked about and we are going to continue to do the retro fits.

We are going to continue to do the new stores.

We've got the continued roll-out of the late model parts as well as the Value Craft and the Duralast line.

As we continue to do that.

It doesn't all hit at once.

It takes awhile to source these things.

A lot of these products are made and manufactured in China and there's a distance in the supply chain in order to bring them over.

As it takes -- as it fills the pipeline and we get these parts in there we expect to see some improvement there in our coverage.

But frankly we've seen a lot of the industry move away from focus on automotive to lots of different kinds of products and we see sporting goods products, a lot of food and those kinds of thing and we have just simply not focused on those areas in our stores and so, therefore, our comps have been driven almost entirely by vehicle solutions which has been our focus.

And we are proud of that but we are a retailer and we need to make sure that we are innovating in all sorts of areas including some of the nonautomotive areas as well.

Last question.

You had mentioned AllData.

Is there anything going on there that you can help this shop owner with that software solution.

Well AllData continues to be a jewel in our AutoZone commercial crown here.

A lot of people may not be familiar with AllData but it's the product that we sell in our commercial program that is a software product that gives access to all the specifications, technical service bulletins, wiring diagrams and so forth.

AllData continues to grow for us.

We now have it in -- well over 50,000 technicians use that -- well over that many shops and it continues to be the market share leader.

But it gift us a package that we can go sell, a complete solution that we can sell to the shop owner.

The data needed and the information needed to fix the vehicles as well as the part solution that we can deliver to them from our stores.

All right.

Thanks.

Thank you.

Jerry Marks with Raymond James.

Your line is open.

Good morning.

Good morning Jerry.

The store base number was up about 6% and top line was up a little bit less than 6%.

How are you going to reconcile the 2% comp?

Remember the stores opened up over the quarter most of which happened in this case towards the end of the quarter.

But the 6% over last year is the net of -- you have to look at the net effect of the number of stores open over the course of the quarter.

There's also the guidance that we have given that new stores when they open up they are about 60% as productive as a mature store.

So, if you adjust the square footage growth for a 60% productivity curve and then the growth that comes along with that I think it comes out.

Then the other thing is your 18.5% operating margin now, a lot of people are wondering how much higher you can go.

What's the highest, your best stores’ operating margin?

And if all of your stores were to run it that way where does it stop and kind of cap out at?

Well, that's an interesting question.

We are very proud of that 18.5% operating margin.

A lot of sectors in retail have to manage to a specific gross because they are so price competitive.

In our case we are not managing to a specific gross or an EBIT margin because our sectors don't tend to be all that price competitive.

If we cut the prices on things we would just simply cut our profitability without the resulting increase in volume.

I think that if you look at our older stores, and I have said this before and I think we need to really make sure that people understand that the stores that are the same age as our competitive stores are comping the same, and so on one hand we are two companies here, we've got -- we are a young store company that's got the same kind of comps as you are seeing with our composition and then but we were blessed with this great older store base that has all the cash-flow in the company.

So if you had the choice of having either the stores and the comps without the financial results, or the tremendous amount of cash-flow in the older stores well clearly you would take the older stores and the cash-flow.

Those stores obviously are producing higher levels of profitability and higher margins.

So we are very pleased with this model mix and I think that we really want to make people understand the value of these older stores even though on average, though, it's harder for to us deliver a spike in a comp.

So it's not about comps, it's about the cash-flow and the profitability that these older stores that are mature will deliver over time.

Okay.

One last question, the payable number sequentially I understand year over year it's up about 10% but sequentially it's dipped down a little bit to 82% from 90% a couple quarters ago.

Any reason for that?

Some of it has to do with the seasonality, Jerry, because as we go into our peak selling season and the inventory turns faster it actually benefits the APDM (ph) inventory ratio so you need to look at it on a year over year basis not a sequential basis.

Okay, thanks.

Thank you.

Frank Brown with SunTrust.

You may ask your question.

Good morning.

Hi Frank.

You may have touched on this already, but I was curious about the commercial business and looking at that 10% comp is that something that we should model going forward steady state that that's a satisfactory comp or is that a target that you all look to get higher over the intermediate term here?

We haven't given specific guidance on a comp but we are never satisfied with our sales where they are at but we are pleased that this is the 15th consecutive quarter of double-digit growth in that business.

We think that there's continued growth available to us on that business as we continue to get better and better.

As we were talking about before on John Lawrence’s question, the addition of these late model parts, we've been a little slow on that and we are going to step that up and get those products into the stores over coming quarters.

As we do that we think that it will help not only our DIY business but certainly help our commercial business going forward.

Are there any other impediments aside from the new model parts that you might have identified in terms of taking that commercial business to the next level?

No, really not because we are sitting here as the only national player that owns all of our stores.

So when you are dealing with the chain accounts out there who have their own company stores or franchise stores around the country they want to go to a supplier like us that owns all of our stores and whose footprint overlays their stores and we are the only one in the industry that owns all of our stores, controls all of our stores and who's footprint is national and overlays their stores.

So this gives us a tremendous competitive advantage.

We also do a great job of getting parts to our customers within 15 to 30 minutes, up and down the street around the store.

So there really are no impediments here except our ability just to go out and attract customers and make sure that we are offering them right parts at the right price.

Just a last question.

Somebody asked this on the last call, in looking at the evaluation put on the company today it doesn't look like investors are rewarding AutoZone for the EPS growth from share repurchase to the extent they might have historically.

Are you all circling back in terms of your strategy there and considering other ways to deploy that free cash-flow?

I think that people need to understand that this huge cash-flow focus, the excess cash flow focus on share buy-backs creates a tremendous opportunity for investors.

If you own 10% of the company or ten shares out of 100, we buy back 10% of the company, you now still own your ten shares but it's ten out of 90 so you now own a greater portion of the company.

That is real shareholder value creation.

And I think a lot of people get a little confused about the share buybacks and I really think that the people who understand it understand what a tremendous value we've created and therefore what a tremendous value AutoZone is today.

So our strategy is to continue to use our excess cash flow to buy back those shares.

That's a permanent increase in shareholder value and for our holders this is a tremendous value creation opportunity.

Thank you.

Gregory Melich with Morgan Stanley.

You may ask your question.

One question on the commercial business and a little bit on the follow up to the last one.

On the commercial side, it looks like you are up about 17 million year over year.

How much of that was Midas?

I believe that you are going to anniversary it in the next month or so.

Am I right with that?

You know Midas was a customer before we entered into the supply chain business with them.

And then we began to roll the supply chain about this time last year and completed it in November of last year.

So you are going to see this transition in lapping this, Greg, over the course of the calendar year.

We haven't said specifically how much of the business is Midas.

I don't want to there but we are seeing growth in Midas, and we are seeing growth in most of the areas of our commercial business.

So is it -- would it be safe to say that the growth year over year in commercial was in part due to Midas, but there was growth in the rest of the business?

That's correct.

Remember last year's quarter we grew over 30% so we are lapping that huge spike last year and we still drove double-digit growth rate.

Because last year was when we saw the first pop in the Midas business.

When did you actually start the new program?

Again, about a year ago so.

So it was in May of last year?

Yeah, about then and it was a roll.

Remember they had eight distribution centers that they shut down sequentially beginning about this time last year and extending into November of last year.

And then the second really on the commercial, how has the take up been on the commercial side of your best category on your private label, your Duralast Gold compared to the traditional branded type stuff?

We've been very pleased with the results in the acceptance of our Duralast and Value Craft products.

There is a bit of a myth out there that commercial customers want branded products and when we really got into the commercial business we added those branded products and frankly the commercial customers didn't buy them and haven't bought them.

They focused on buying our brands which is why we are confidently moving forward and we've added the Duralast Gold friction which are break pads and shoes.

That program we've begun to roll-out and so we do so confidently and we see great acceptance by our commercial customers.

And then a follow up to the one on the share buybacks and the creation of value.

At what point do you as a CEO get concerned that one shareholder if you keep buying back stock will end up owning too much of your shares, does that figure into your calculation?

No, listen, I just encourage all of our shareholders to own as much of the company as they want.

Our strategy is to create shareholder value for all of our shareholders and whatever percentage they own the company going forward.

Mathematically if you did a model you can model this out and if we bought back shares at this rate going forward you would take 30, 40 years before -- people say, you are going to buy back the company in a couple of years, it doesn't work mathematically, you are talking decades and decades and decades of going forward.

And by the way who is going to, who would want that last share and what's the cost of that last share?

As you buy back the shares there are fewer out there and there is lower float and the shareholders that hold get the benefit of that shareholder buy back.

So this is a really shareholder value creation strategy and we are pleased and dedicated to the results of this going forward.

You are fine if one shareholder ends up with 30, 40 or 50% of the company if that's what happens?

We don't see that happening mathematically.

But listen, anyone can buy whatever percent of the company that they want to buy and the share buybacks are benefiting our shareholders proportionate to the percentage that they hold of the company.

Okay.

Thanks.

That really concludes our time.

I'd like to wrap things up.

Thank you to everyone for participating in today's call.

That concludes today's conference call.

You may disconnect at this time.