汽車地帶 (AZO) 2004 Q4 法說會逐字稿

Welcome and thank you for standing by.

This is the conference to discuss AutoZone's fourth 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 5:00 p.m. central time, 6:00 p.m. eastern time.

At this time, all participants will be in a listen-only mode until the question and answer session.

Today's call is being recorded.

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

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

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 the availability of commercial transportation.

Please refer to the risk factors section of the Form 10-K for the fiscal year ended August 30, 2003 for more information related to these risks.

Actual results may materially differ from anticipated results.

AutoZone takes no obligation to publicly release any revisions to forward-looking statements contained in this presentation to reflect event 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 is providing metrics that are not calculated in accordance to GAAP.

For reconciliation of these metrics, please see AutoZone's press release at the investor relations section at www.autozoneinc.com.

Thank you, Mr. Odland.

You may begin, sir.

Thank you for joining us today for AutoZone Incorporate fiscal 2004 fourth quarter conference call.

With me today are Mike Archbold, AutoZone's 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 are available on our web site, www.autozoneinc.com.

Please click on the quarterly earnings releases to see them.

Quarter four was a difficult sales quarter for us in this difficult macro environment.

In spite of that, we are pleased to announce the fourth quarter continued our trend of record earnings and earnings per share.

These records are since we became a public company back in 1991.

We continue to maintain metrics at the highest level since AutoZone became a public company in 1991.

While this quarter reported a disappointing negative 3% comparable sales result, we were able to reduce our expenses appropriately, manage our cash flow and repurchase our stock to report an 11% increase in earnings per share on top of a 31% increase in last year's quarter.

For the 16-week quarter, we reported sales of 1.836 billion, an increase of 3% ended August 30, 2003.

Gross profit as a percentage of sales for the quarter improved by 1.6 percentage points.

While operating expenses as a percentage of sales increased by 1.5 percentage points.

This resulted in an operating margin of 19.8%, up .1 percentage points from last year.

Operating profit increased 1% over the prior year.

Net income for the quarter increased by 1% to $209.4 million.

And diluted earnings per share increased 11.2% to $2.53 from $2.27 in the year-ago quarter.

Our disciplined capital management resulted in another record return on invested capital for the trailing four quarters of 25.1%.

For every dollar invested in the business, AutoZone easily exceeds its cost capital, creating a continued competitive advantage.

We will not deviate from our efforts toward optimizing shareholder value.

We will continue to be fiscally prudent with our capital improvements while attempting to optimize our earnings per share.

For the full fiscal year, sales were $5.637 billion which were up 3% versus the prior fiscal year and earnings per share were $6.56, up 23% on top of last year's earnings per share increase of 34%.

Now I would like to turn to the do-it-yourself business and talk about sales for the quarter.

For the quarter, as we said, retail sales were down 1%.

This decrease was definitely not expected.

Back on June 30, we reported our same-store sales had run a minus 1% through the first seven weeks of this quarter.

We completed a thorough analysis of our business at the time.

While our average ticket remained up versus last year, the number of transactions crossing our registers was deteriorating at a surprising rate that correlated with the sudden rise in gas prices.

As many of you know, we continue to study our business quantitatively to understand its drivers.

For the first time we've seen a correlation to our numbers of transactions and gasoline prices.

Well, gasoline prices have ebbed and flowed overtime, this is the first quarter we've seen a statistical significance to transactions at the store level.

These higher prices at the pump led to fewer miles driven per vehicle for this time period.

The Federal Highway Administration's website shows the monthly miles driven.

We have long known and spoken of miles driven as being a key macro driver for the industry along with a number of registered vehicles on the road.

Unfortunately July and August did not lead to any reprieve on the gas front.

Therefore the best estimates we have available continue to be challenged.

The federal highway administration does not have final July or August numbers yet.

However, they have said they are seeing no change from the June statistics.

Our analysis indicates the gasoline prices are the primary cause for the slowdown, we are by no means perfect and have plenty of opportunities for improvement.

Those opportunities exist in fiscal '05 for AutoZone to increase our advertising spending, our instock level, store level execution, visual merchandising and additional merchandising availability.

As I mentioned last quarter our inventory levels were too low.

We needed to put more late-model parts coverage into our stores.

Finally our category management initiatives still have a long way to go.

This is our core business and we will continue to drive to create a compelling shopping experience for all of our customers.

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

So what were some of the successes in the quarter?

First our restore refresh program.

Last quarter we remodeled 71 locations.

These remodels continued to deliver results as required with minimum investment.

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

Along with our ongoing radio campaign, we continued to utilize television and introduce print media into the mix to reach a wider customer base.

In this challenging environment we're seeing, it is important to convey a message of superior quality, assortment and selection in order to win the customers and overcome that deferred maintenance.

We continue to focus on marketing opportunities toward our drive-time customers during the past quarter.

Radio was and will continue to be a focus or us.

Our television spots regarding anything you want generated broad customer interest in our stores.

Lastly we tried newspaper inserts nationally distributed beginning in July.

The goal of the flyer was to increase foot traffic behalf levels seen during the first seven weeks.

But we found the ads to be only moderately successful in the face of rising gas prices.

Over the past couple of quarters I've mentioned how the Company has been managing over 100 projects to create quick-hit opportunities for us to grow sales and manage expenses efficiently.

These projects contributed millions of dollars to our EBIT for the quarter.

We have identified scores of new projects for the upcoming fiscal year and we're excited about our opportunities.

These projects really do move the sales and expense for our company.

Just to give a few examples, we rolled out several quick hit initiatives to the merchandising line-up to take advantage of low-hanging fruit.

Those are some of the red zone hot deals on products that are new and appropriate for the selling season.

Things like new brake and carburetor cleaner.

Other examples would be small apparel offerings.

And a new to market video game that advertises auto zone throughout the playing field.

On the cost front we renegotiated our annual communication fees with our phone provider and found significant savings.

We continued to convert our credit card paying customers to debit card and experienced over a million dollars in savings year to date.

We've identified opportunities to reduce utilities costs and increase direct deposit rates, reducing our costs of handling paper checks.

Lots of opportunities both on the sales side.

These are examples on the sales and cost front.

On the customer service front, I'm proud to announce our ongoing initiative to increase the number of ASE certified employees throughout the organization.

In fact, over the last two years, we've almost doubled the number of ASE parts certified employees.

We feel that customer service is what differentiates us from everyone else.

And the ASE certification tells our customers their store has AutoZoners who have been recognized by the entire automotive industry as being certified parts professionals.

Sponsorship of the NASCAR elite racing series has created a cross selling merchandising opportunity.

This series covers 51 races and includes over 250 driving teams today.

This is a great opportunity to reach a dedicated audience and those fans following the sport.

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

We continue to work with NASCAR to maximize our exposure to a wonderful core customer of AutoZone.

More recent initiatives include the new truck zone.

This is an area of the store that features our light truck and SUV accessories.

It is now in 800 stores and ultimately anticipate the majority of our stores can benefit from this new merchandising effort as the fleet continues to age.

We continued our strategy of establishing a good, better best delineation for most part categories.

For example this past quarter we completed the rollout of Valucraft headlights and other categories.

Value craft motor oil, value craft batteries.

While these are just a few of our efforts, we feel we've only just begun to scratch the surface, what we can do with brand development in this industrial.

Value craft will continue to be rolled to additional categories in the future.

These additions help to fill a gap in coverage that we've had in our good category within these segments.

And we expect to continue next quarter with value craft introductions in multiple categories.

This past quarter we continued our rollout of our new proprietary line of friction products to fill the best category line as one more example of our relentlessly creating the most exciting zone for vehicle solutions.

The impact will be felt throughout fiscal 2005.

This line is entirely new to AutoZone and we're very excited about its potential for our DLY and commercial customers.

We will continue to extend our brands overtime.

Proprietary brands represent a majority of our sales making AutoZone the exclusive place to get some of the best recognized brands in the entire industry.

Our good, better, best program allows us to provide the right parts at the right price.

We will continue to take advantage of introducing certain products as skimming opportunities to take quick hits and optimize sales and profits.

By continuing to keep the product assortment fresh and exciting, especially adding interest to our stores, we feel we're helping to create the most exciting zone for our customers.

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

At the end of the fourth quarter we had $147 million in inventory on Pay-On-Scan and expect continued success with this initiative.

Mike Archibald will take you through more on that area.

We expect our inventory levels per store to continue to decrease as Pay-On-Scan grows.

This will continue to benefit our working capital numbers as well.

However, I want to point out that we expect to continue to add skus where appropriate, but have the incremental costs offset by accounts payable and Pay-On-Scan.

We continue to only invest or add inventory that exceeds or 15% IRR hurdle.

And we're excited by what our new merchandising can mean to us.

We continue to believe the car model proliferation requires us to continue to invest in inventory.

Two thirds of our skus have an on hand of only one, and that's why these initiatives are really important and give us strategic advantage.

For the trailing four quarters sales per square foot were $259.

This statistic continues to set the pace for the rest of the industry.

We opened 84 stores during the fourth quarter.

Of our 2002 total opened for the fiscal year.

New store productivity continues to improve.

That gives us a total of 3,420 domestic stores open at the end of the quarter.

We also told you last quarter how we purchased the assets of ABC auto parts based in Philadelphia.

This chain of 12 stores had a strong local market reputation for service, quality, good real estate and great people.

It is a perfect tuck in type strategy for us.

We now have reopened seven of these stores by the end of the quarter.

And these seven are in our 3,420 store count.

We expect to open the remaining stores under the AutoZone brand name in the upcoming first quarter.

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

Year to date we opened 195 new stores.

Plus the seven conversions for a total of 202 stores.

We intend to open around 200 stores again in fiscal 2005, representing a continue 6% growth.

And we feel well in line with both our capabilities and the demands in the marketplace.

In summary, we began the quarter with great expectations.

While we made some progress in the past quarter, sales were inhibited by the drop in miles driven and the fall off in store traffic due to higher gas prices.

Gas prices for regular gallon of gas jumped from $1.45 at the start of the calendar year to over $2 by May.

A 40% jump in gas prices.

We in turn reduced our expenses appropriately and managed in a way to optimize shareholder value in an environment where sales were not materializing.

We continue to believe the fundamentals of our business and industry are intact.

Our ability to improve on these trends over the next couple of quarters may depend on consumer spending in face of rising gas prices.

We intend to continue to focus intensely on profitably growing our sales over time through better customer service and merchandising.

Now turning to commercial sales.

We made a conscious decision this quarter to stop reporting separate comps for the businesses.

For AutoZone only a complete store can be counted in the same-store calculation.

And with commercial being another customer run through the register, we decided to take a look at the total comp across the store to get an accurate view of what was going on with the business.

As a commercial business has become more significant to our stores.

The total comp number is the most important and appropriate measure.

Others within our industry and in other industries did not split out professional and seller sales.

So we have decided to stop reporting the numbers and to simplify the message in the future.

We will however continue to report total commercial sales.

So for the quarter, total commercial sales were up 5% from last year.

We now have the program in 2,009 stores supported by 118 hub stores.

Last quarter as we've expanded the program to an additional 21 stores.

Hub stores continue to provide us with fast replenishment of merchandise.

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

A little slower than last quarter's.

We found the slowdown in retail transactions coincided with our commercial business.

Our commercial customers have seen a drop off in their store traffic thereby diminishing their parts purchase.

We focused on customer service, we focused on that because we believe in tougher times it is even more essential than ever to be able to differentiate yourself.

We have a great team focused on not only growing sales commercial but growing them profitably.

Environment where our commercial customers just didn't have the business, still, with only about 1.5% of the commercial sector's business, AutoZone has significant opportunity to gain market share over time.

We have grown significantly faster than that market over the past few years, and we have the opportunity to add more late-model parts to fill in the gaps.

We're still managing overall inventory levels.

This sector is highly fragmented.

In an industry that the automotive aftermarket states is a $50 billion industry.

And growing around 4% a year, we are confident our model can continue to grow and add shareholder value overtime.

Now turning to Mexico.

Our Mexico stores continue to perform well in the quarter.

We opened three stores during the quarter which now gives us 63 stores opened in Mexico compared with the U.S.

Our ongoing commitment remains to grow the business.

Gross margin for the whole business for the quarter was 49.2% of sales, up 1.6 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 effects of EIFT issue 0216 and one-time warranty impacts gross margins were consistent with last year's.

Maintaining gross margin was directly attributable to our ability to manage in the face of slower sales environment.

Continue to be 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, continuing the implementation of our good, better and best product lines which allows pricing to different customers needs as well as managing gross margin.

We have managed our pricing strategies over many quarters and expect pricing unto itself to have very little impact to us into the future.

Until recently, AutoZone was one of the only companies in our sector to report warrant liability, although we were not likely the only one with the exposure.

We continue on our multiyear effort to move warranty liability up the supply chain to our vendors when the costs are lower.

This is more efficient for us and for our vendors It puts the responsibility with the vendors who are now in a better position to manage it.

For the first quarter of 2004 the Company experienced a warranty gain of $16 million pre-tax or 11 cents per share.

The Company experienced no gain from warranty negotiations during the second quarter of this past fiscal year.

The third quarter the Company experienced a warranty gain of 8 cents per share.

In this quarter's efforts resulted in a pre-tax gain to operating profit of $15.5 million or 12 cents per share.

And that's versus the $8.7 million last year or 6 cents per share last year as we relieved AutoZone of that future liability and lowered the risk level for the Company.

The full-year warranty impact therefore was $42 million in operating profit or 30 cents a share versus $8.7 million or six cents a share in last year's fourth quarter.

As of the end of this year, now, we have only $6 million remaining liability which means that we have substantially completed our initiative to remove this risk.

With that said, we believe there continues to be margin expansion opportunity.

Albeit at a slower pace than previous years.

Those efforts have been at the forefront of our industry.

And we feel that we have continued opportunities to work with our vendors to lower costs and provide the best selection of merchandise for our customers at the right prices.

Now, turning to expenses.

SG&A for the quarter was 29.4% of sales, up 1.5 percentage points from last year.

But 1.15% was due to the reclassification of EITF and the one-time credits earned a year ago. 36 basis points were due to the 71 store refreshes that were completed in the quarter.

And also the late quarter opening of 84 new stores.

So we expect to see the benefits over future quarters.

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

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

Full-time AutoZoners continue to be the core of our customer service.

We utilize part-timers to flex our staffing up during peak times of the year.

Approximately 65% of the head count have been full-time.

More importantly, the percentage of full-time hours in our stores has remained consistent for the past three years.

These full-time hours are critical to delivering trustworthy advice.

Advertising costs were up versus last year.

Frequency continues to increase and we continue to roll out our television campaign in the quarter.

Our advertising expense may actually increase in 2005 in order to drive sales.

But we expect vendor support to neutralize any negative impact to the operating profit.

So despite a negative 3% comp, EBIT for the quarter was $364 million up 1% versus last year.

With the ability to grow profitably, we continue to see possibilities to improve our gross margin and SG&A as a percentage of sales in the future.

Interest expense for the quarter was 28.7 million compared with $26.7 million a year ago.

Debt outstanding in the quarter was $1.869 billion versus $1.5747 billion last year.

Over the quarter our debt levels were guide.

We're pleased with our anti to lock in rates at historically low levels.

So we have purposefully managed our capital structure relative to our cash flow in order to maintain credit ratings and investment grade while reducing our cost to capital.

For the quarter our tax rate was 37.5%, down from 37.8% last year.

Net income for the quarter was $209.4 million.

Earnings per share for the quarter were $2.53 up 11.2% on 82.9 million diluted shares.

For the year, net income was $566.2 million, up 9.4% over the prior year.

And earnings per share for the year were $6.56 up 22.8% on 86.4 million diluted shares.

These results are consistent with our ten year earnings per share growth rate of 24%.

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

Thanks, Steve.

This quarter we generated $302 million of operating cash flow and bought 3.9 million shares for purchase amount of $318 million.

Through the fourth quarter of this year, we reported another ROIC improvement of 25.1% up from last year's 23.4%.

Focus on ROIC underscores our belief that it and EPS growth are the best indicators of creation of shareholder value over the long term.

Looking at the balance sheet highlights, inventory per store on the balance sheet which excludes the Pay-On-Scan inventory is now down 448,000 versus last year's $426,000.

Even more impressive, our inventory per store net payables which was reduced even further from 46,000 down to $38,000 per store.

We improved our net inventory turns in the quarter to 21.8 times.

Accounts payable as a percent of gross inventory increased to 92% from 90% last year as we continue to march toward our goal of achieving 100% accounts payable to inventory over time.

This quarter as Steve mentioned earlier, we reached a total of $147 million of inventory on POS.

Which is not reflected on our balance sheet in accordance with GAAP.

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

This effort will continue to grow as more and more of our vendors transition toward the program.

As with last quarter, we'll be using a couple of new terms to describe our inventory levels going forward.

Gross inventory will be used to define the inventory excluding POS inventory.

Net inventory will be used to define gross inventory minus the accounts payable.

As we continue to increase the dollars of inventory on POS , we continue to expect -- we continue to expect to report reduced inventory per shore into the future.

Total working captain at was up $29 million from year ago level.

Negative territory and a negative $62 million of working capital.

This was attributable to our increase in accounts receivable.

Primarily driven by funds due from our vendors along with our increased commercial program.

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

Net fixed assets were up 4.3% over the prior year.

Capital expenditures for the quarter totaled 73 million.

Depreciation and amortization for the quarter was $34 million.

And reflects the additional expenditures required to open the 84 new stores this quarter, complete the 71 refreshes and work on site development for the upcoming quarter.

Our debt at the end of the quarter was 1.869 billion.

With these trends our EBITDA interest coverage is now at 11.9 times.

In the third quarter we entered into hedging transaction which lock in the interest rate for an additional note.

As of August 28, 2004.

We continue to be comfortable with our long-term debt rating.

Shareholder equity declined reflecting the repurchase of our common stock over the past four quarters and our return on equity for the 208% versus 97% in the quarter last year.

Now I'll turn it back to Steve.

Thank you, Mike.

Customers poured their money into their gas tanks instead of doing preventative maintenance.

We understand the challenges of what gas prices can represent to our average customer.

Our customers fix their cars themselves because they can't afford to have it done for them.

When the transportation cost increase 30 to 40% it is easy to see why they respond by cutting back on maintenance.

But our financial model is strong.

And we have continued to increase earnings and cash flow while improving our business model by removing risks associated with interest rate fluctuations and warranty liability over long periods of time.

This consistency in cash flow will continue to be our focus.

We've accomplished this during both strong and weak economies.

We call our business acyclical and still believe it is.

Higher gas prices unto themselves are not economic cycles but can have an impact on the macro factors that do drive our business like number of miles driven which can lead to deferred maintenance.

There are three possibilities for gas prices in future impact.

One possibility is that gas prices continue to rise.

And that they continue to put pressure on the consumer's spending habits.

This obviously is the worse case as miles driven may continue to decline.

But cars are still going to break, and they are still going to need to be fixed over time.

Likely in that scenario, the consumer would defer as much maintenance as they could.

The gas prices stabilize.

It is possible overtime the consumer will become acclimated to paying for gas at these prices.

Consumers have learned to adapt to higher prices.

We expect this could happen in the United States as well.

However, there has to be a consumer buying behavioral transition.

Eventually car owners still need to repair and maintain their cars.

Third possibly is that gas prices come down to where they were earlier this year and hopefully customers will begin to do the deferred maintenance.

So last I would just like to review some answers to obvious questions.

That you may have.

First of all, first question, has the company somehow been underinvesting in the business and therefore hurting our same-store sales results?

Our answer is without hesitation, no, we have not.

We're spending absolutely everything we can.

But we're not going to spend for the sake of spending.

Our stores are relatively utilitarian.

They are constructed of cement block.

Drop lighting, metal shelving.

That's the whole store.

In fact from the ground up our store fixturing averages around about $600,000 per site.

When we refresh the stores the costs are not astronomical.

Next question, why have the comparable sales been lower than some of the competition in the past few quarters?

Well, the answer is because we don't look exactly like our competitors.

The average age of our stores is 8.4 years old versus our next competitor's stores average less than 5.

And other competitors are lower than that.

However, our old stores perform wonderfully from a cash flow basis.

The biggest impact is lots of competitors have opened more stores near the older stores.

And those new store openings impact us.

Our history has shown in the short run we lose a small percentage of our business.

So we're determined to create the best shopping experience for our customer.

Our trustworthy advice.

Price leadership make us the clear number one choice for our customers.

And we expect to continue with the leadership position.

AutoZone has the most productive stores in our sector from sales per store, sales per square foot to operating margin to ROIC and every factor we out perform our competition.

Our focus frankly is on the customer and not the competition.

Can we do things to offset the recent deterioration and transaction count within our stores.

The answer is definitely yes.

We can focus on those items and merchandise categories the customer should be thinking about.

And we will continue to focus hard on reminding consumers to maintain their vehicles before they find themselves stranded later on or with larger repair bills to pay.

We're going to work aggressively this coming year on a customer service effort to continue to differentiate ourselves from the pack .

This was clearly evident this quarter in our ability to drive an 11% increase in EPS despite soft comps.

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

And we can continue to repurchase stock as long as it is 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're very proud we continue to demonstrate industry leading financial results.

We have proven our ability to manage costs appropriately.

We are focused on operating this company to grow profitably and efficiently deploy capital in order to optimize long term shareholder value while maintaining the highest level of ethics.

At this time we're ready to begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Bill Sims.

Would you please state your company name.

Smith Barney.

Good afternoon.

You continue to pull inventory out of the stores.

I'm wondering why in this present quarter there wasn't a greater focus on out of stock.

If there was, can you just comment on where the out of stock stood two quarters ago relative to today.

Thank you.

A couple of things, Bill.

This is Mike.

I want to first point out, the balance sheet inventory number excludes the pay on scan inventory.

Pay-On-Scan to show what is really available for the customer, you'll see that our inventory levels are up.

That being said, we would say that there is still not to the in stock levels we would like.

We don't disclose an exact number.

We penalize ourselves tightly on our metrics.

We can always do better.

It is one of the things that Steve mentioned in the presentation that we still see opportunities to improve our coverage, particularly with a focus on late model coverage.

We begun that in this past quarter and even in the quarter before.

But we still think we've got some ways to go there.

One last question, if I can.

Now that you've consolidated in the commercial and retail comp, it was tougher to see the trends in your business as the quarter progressed.

At the end of June.

Can you give us an indication in terms of your outlook?

Stabilizing retail sales or did sales continue to weaken throughout the quarter?

And can you just give us any color as oil prices have moderated somewhat, have you seen any rebound in sales to date.

Thank you.

At the seven-week point we updated the sales number.

The sales following that were weaker as the gas prices increased.

And our view is the gas prices have not changed.

We're only a couple weeks into the fourth quarter.

They haven't changed here in the past several weeks and neither has our trend.

So really, again, we've got customers that fix their cars out of economic need and they are pouring a lot more gas into their cars.

If a customer makes $400 a week and they've got an SUV, you're filling 35, $40 a tank.

It's a lot of money to these people.

But they can't do that forever.

And deferred maintenance only goes so far.

It's got to come back at some point.

That's why I try to describe three possibilities with gas prices into the future.

Thank you.

Our next question comes from Gerry Marks.

Simply state your company name.

Mr. Marks, your line is open.

Hi, Raymond James.

Hello?

Hi, Gerry, go ahead.

Sorry.

Thanks, Steve.

Quick question for Mike.

How come depreciation went down?

Depreciation went down.

It is only down very slightly.

It is due to the continued maturation of our stores.

And our average stores are now 8.5 years old.

Since our fixtures and equipment actually have a life less than that, we have some fixtures that have become fully depreciated.

There is no change in depreciation logs or anything like that.

Okay.

And then you mentioned in terms of -- you announced a few weeks ago you're going to be building a new distribution center.

You mentioned on the call you think gross profit margins can remain relatively stable.

Is the early part of that new distribution center being built out?

No.

The distribution center -- we did announce we're opening a new distribution center outside of Dallas, Texas, that replaces a 50-year-old facility also in Texas.

So it is an updated and upgraded facility.

It is our last old facility we're replacing.

We don't foresee any impact to our gross margin during the quarter

You're still going to stay on average of 8?

This is just a replacement?

We haven't given a prediction where we go.

Our intent -- we think we're at a good level.

And we've grown the business.

I think we've added a thousand stores at this level.

So this gives us the capacity we need.

We're not look for incremental capacity at this point.

Okay.

And then I guess kind of a philosophical question.

You guys mentioned quite a bit about the miles driven and the consumer that is being impacted.

From what I understand those miles driven numbers include kind of commercial heavy duty truck numbers.

I guess I would be a little curious in terms of how long you guys have observed this type of correlation versus regular consumer spending levels and other factors that might influence the overall miles driven.

What we've said we've done a lot of quantitative work right along.

And gas prices have remained relatively stable particularly over the past three to four years.

So we have not seen the correlation of gas prices.

We've not seen them jump.

This year they jumped 40% up to May.

That kind of an impact is a true dollar impact.

And it is something in filling a tank of gas, as you know, people can see that and feel that it is a big cash outlay.

We think that's the reason why.

Now for the first time we're seeing a statistical hit.

We haven't seen that before.

However, we have said right along for years that the two things that were not cyclical from a recessionary standpoint, the two macro factors that impact our business are miles driven and the number of older vehicles on the road.

Gas prices directly impact the number of miles driven.

And when they do, when that happens, as it has in this quarter, of course we've seen the impact on it.

But this is new ground for us.

Grass prices haven't jumped 30 to 40% like this in a very long time.

Last question.

I noticed that if I back up the domestic stores, your other revenue line items seem to grow at a lot slower pace than the overall number of stores you added in Mexico. 15 or 20%.

Was there any reason for that?

Were there slower revenues?

Or new store efficiency in the Mexico stores?

No change.

Our other revenue, of course is Mexico and all of that.

And we continue to be very pleased with the growth and the results and the returns on those businesses.

So I'm not sure exactly what you're seeing.

Okay.

Next question.

Our next question comes from Matthew Fassler.

Please state your company name.

Goldman Sachs.

Good afternoon.

Hi, Matt.

A couple questions if I could, first of all if you could give us a sense as you saw the sales come under pressure and you thought about your cost structure, where you saw opportunities perhaps to take some expenses out of the business.

Over the course of the quarter.

That's an interesting point.

What we do, what we've really focused on is how can we manage our sales differently.

How can we look at simple things like how do we wind up traveling less.

How do we cut costs at the store support center here.

Which is the cooperate overhead cost which aren't going to impact customer service.

And it is taking on a lot of little things in order for us to be able to manage.

Now, that's all in addition to the 100-odd projects Steve referred to in the presentation, which is what we do every year, which takes the SG&A out of this business.

We've cut these expenses.

That was part of Steve's message in the prepared part, which talked to the fact that the labor, the trustworthy advice is sacrosanct.

Second question I have relates to mix.

I'm curious.

As you saw miles driven come under pressure and some discussion coming from some of your competitors over the course of the quarter about weather what you saw in the merchandise mix that might shed some light as to what consumers are thinking, what kind of projects they are spending on and where they are holding back.

Yeah it is a good question.

And we did not mention weather.

Thank you for that.

Different from our competitors.

We tended to see better results in things like windshield wipers, which says that the weather was wet.

And poor results in heat-related categories.

And that was pretty much around the country.

But, you know, we typically don't like to talk about weather.

I think we have once where it truly was significant.

In our case, it tends to wash out over time.

Would you say just out of curiosity as weather has normalized -- you can't call the past month normal.

Issue kind of lingered?

I'm not sure whether it has normalized or not.

How many more hurricanes can we take.

Right.

But you know, look, I think the weather is not really what has impacted our business over the quarter.

I mean, it is noise on the margin.

And which is why we haven't talked about it.

The real statistical driver here has been the gas prices.

One other quick one, please.

Just in terms of the commercial store count.

I know you had 2009 looking at the May press release, I believe the number of commercial stores in that release was 2199.

That would imply a decline in the number of stores in the commercial programs.

So I'm curious whether I'm misreading it or whether you did, in fact, pare the program back a little bit.

We have identified some stores that were less productive and if we didn't think they had an opportunity to ultimately achieve a 15% hurdle rate, we have closed some stores.

But it really has only been a handful of stores.

Our reach to our commercial customers.

Sometimes we find we've got overlap and we don't need to do it.

Look, this thing is going to move around on us over time.

Thank you very much.

Thank you, Matt.

Our next question comes from Armando Lopez.

It's Gregory Melich with Morgan Stanley.

Couple questions.

One is on the percentage of leases in terms of the stores you added this year.

Do you have that number?

It is about 60% of the stores that we opened that were actually leased.

I don't have the exact in front of me.

About 60%.

That's up a little bit.

That the main reason the CapEx ended up below $200 million?

50% lease.

So your question, is that why the CapEx?

The CapEx was under $200 million.

Our preference and our bias is towards owning our stores.

And I think everybody knows that we own greater than 60% of our stores.

But as we continue to fill out or markets in tough real estate areas on the coast, we're finding it more difficult to own those stores.

In those cases we lease.

From a performance standpoint we don't see a difference in the financial performance of those stores.

But that is the difference between the CapEx and why it is changed, yes, Greg.

And do you have any numbers for CapEx for next year, Mike?

There will be about 200 stores that will open up next year which is consistent.

At this point we say a number consistent with this year.

Okay.

And then but more specifically on the private label, I had the growth and private label been noticeably helping the mix, all else equal.

And as part of that, as you brought a private label into areas like gold brakes, did you notice any impact either positively or negatively in that category as a result?

It is a good question, because we really view our private labels program as a strategic advantage for us.

Well over a billion in sales which makes it one of the largest brands in all of America.

Value craft is a strong name as entry level.

As we expand it, generally, the margins are better on those kinds of products.

And I think we've been consistent in saying the majority of our sales are in our private brands.

This past quart is a little tough to say, Greg, because there is so much noise and so much change due to some of the macro factors.

But I think over time, what we have as we fill out the lines, if we had a better and a best range before and we had a value craft or an entry level range, it gives us the opportunity to optimize pricing on the higher level ranges and therefore effect our mix in that way.

Part of our ongoing category management efforts, which is why I said up front our category management efforts, they really have a long way to go, still.

You don't think it had anything to do with transaction deficit so to speak.

Part of that is seasonal thing.

This is our fourth quarter and our largest season.

And I think it is seasonally our largest and highest percentage gross quarter.

Okay.

Thanks.

I think our next question comes from Cid Wilson.

Please state your company name.

Cid Wilson.

Whitaker Securities.

My impression is that you mentioned in your newspaper ad initiative that you weren't happy with that.

I was wondering if you could give us an idea exactly what it was you saw and what your plans are going forward, if you're factoring -- if you're going to factor in the higher gasoline prices in terms of your new initiatives.

It is interesting, most retailers do circulars in some fashion.

Those are newspaper inserts featuring lots of different things.

Typically they are price promotion related.

We have said specifically in this industry, it is not highly priced sensitive.

That continues to be the case over all.

When people have failure of parts and come in and need a part.

The ways to our category management system that we offer things at the right price and the right warranty and the right quality for the customer's need rather than having to discount price.

And so therefore the circulars work in a different way.

We've tried circulars a few times in tests.

And we dropped one nationally in this time period.

Frankly, it didn't do all that much for us, which is why we don't usually drop them.

And obviously it underscored everything we've always said about price competition, although this wasn't a deep discount kind of a circular.

It was more of a discussion, a mix and the featuring of our programs.

So look, it is -- what we're going to try to do is turn over every stone we can in order to drive transactions into the store.

That's what all advertising and marketing do as it tries to drive traffic into the store, which is what transactions are.

And that's where we need to pick up the pace here.

And overcome the macro factors.

Okay.

And my next question, you doubled the number of stores at the truck zone, up to 800 from 400 last quarter.

If I have that correct.

Any difference in terms of the comps in those stores?

We are pleased with the truck zone addition.

It's got an area, corner of the store delineated through signage and features.

The various SUV and light trucks parts and accessories that people like to shop from.

They have -- those sections have incremental skews.

But the majority of the skews are available in other stores.

We think we're appealing to those growing group of light truck and SUV owners.

That section does grow those categories for us and we're pleased with the growth.

We haven't talked about what impact on the total.

My last question is, can you give us any guidance in terms of which month was the one that was the most challenging?

Was it more July or August?

As I said earlier, when we did the update at seven weeks, we were down minus 1.

We finished down 3.

Clearly the back part of the quarter was more challenging for us.

I was trying to figure out if it was more July or August.

We suffered through both of them.

Okay.

Okay.

Thank you very much.

Our last question comes from Matt Nemer.

Thomas Weisel Partners First question is, your articulated the impact of gasoline prices on the consumer.

And I'm wondering if you can quantify the impact of higher energy prices on your distribution costs.

Is it enough to move the needle, or is it too small?

Well, it moved the needle a little bit.

We were able to do some things up front and buy in advance and be able to lock in some diesel prices.

So that aspect of the energy cost was not hugely significant.

Also in our stores, we don't have huge energy using stores like some retail operations.

It is mostly the light bills essentially.

We weren't disproportionally affected there either.

Okay.

The next question is, I'm not sure if you've disclosed this before, but I'm wondering how much you're spending on the store refresh per store.

And also what sort of impact do you see to comps after refresh.

What we've said, we could spend about $10 million a year.

And with that, we could do about 500 stores if we had to.

So the CapEx number associated with that would be about 20,000 per store.

Some expense associated with that.

We've talked about that in our SG&A.

But the capital is very minimal.

And then the returns obviously we expect a 15% return on that $20,000 investment per store.

So you're pretty much back into the impact.

It is not huge, because it is a small capital spend.

But we still expect to get that same kind of 15% return on that investment.

Over a one-year period?

No.

Really it is an IRR.

So you have to get it and keep that for a couple of years.

Okay.

And then my last question, is on store openings, can you give us a sense of what your focus is there, either by region or size of the markets that you're going into.

In this past quarter and for the following year?

Well, we look all over the country.

Because we continue to have opportunities all over the country.

We said consistently we're at 3420 stores now.

We think there are thousands more we can build.

We're only halfway through our full buildout.

There are opportunities everywhere you look.

But we spread it around the country in order to grow and take advantage of building the trustworthy advice in the stores around the country.

So we have stores that open with AutoZoners with the right brand and that's got to have the right advice.

We have done more fill in stores over the past year which does hit our comp as we overlap in areas where we already have existing stores.

But the stores in total continue to do well and exceed the 15% IRR even and the stores around them continue to exceed their projections.

So it helps comp a little bit, but it is the right thing to do from a strategic standpoint.

We're going to continue to use that strategy going forward.

And trying to fill out our store base around the country.

One quick follow-up to that.

Is it your sense -- are you aware of any markets in the U.S. that you would classify as becoming somewhat over saturated with DIY retail stores?

It is hard to say, Matthew.

Because 65% of the share is in the nonchain stores.

So the mom and pops, reality.

This is one of the most highly fragmented industries there are.

The top five chains only have about 35%.

It is hard to put your finger on all of that.

The industry is going to continue to consolidate.

And that's why we think that the kind of square footage that is being added is very, very productive square footage.

And financially good for the industry.

Great.

Thanks very much.

Thank you, Matthew.

Since we're at the end of our time, I would like to wrap things up.

Thanks very much for participating in today's call.

And we'll talk to you next time.