汽車地帶 (AZO) 2005 Q3 法說會逐字稿

Welcome and thank you for standing by.

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

Bill Rhodes, the Company's President and CEO, 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.

Before Mr. Rhodes 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.

Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, positioned, strategy, and similar expressions, these are based on assumptions made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate.

These forward-looking statements are subject to a number of risks and certainties, including without limitation, competition, product demand, the economy, the ability to hire and retain qualified employees, consumer debt levels, inflation, raw material costs of our suppliers, gasoline prices, war and the prospect of war, including terrorist activity, availability of consumer transportation, construction delays, access to available and feasible financing, and our ability to continue to negotiate pay-on-scan and other arrangements with our vendors.

Forward-looking statements are not guarantees of future performance and actual results.

Developments and business decisions may differ from those contemplated by such forward-looking statements, and such events to could materially and adversely affect our business.

Forward-looking statements speak only as of the date made, except as required by applicable law.

We under take no obligation to update publicly any forward-looking statements, whether as a result of the new information, future events or otherwise.

Actual results may materially differ from anticipated results.

Please refer to the "Risk Factors" section of the Form 10-K for the fiscal year ended August 28th, 2004 for more information related to these risks.

In addition to the financial statements presented in accordance with Generally Accepted Accounting Principals, AutoZone provided metrics in this presentation that are not calculated in accordance with GAAP.

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

Mr. Rhodes, you may now begin.

Thank you.

Good morning, and thank you for joining us today for AutoZone's fiscal 2005 third quarter conference call.

With me today are Mike Archbold, Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President of Investor Relations and Tax [ph].

I hope you had a chance to read our press release and learn about this quarter's results.

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

Please click on "quarterly earnings releases" to see them.

Before I talk about the quarter, I wanted to take a moment and say a few words about AutoZone and my recent appointment as President and Chief Executive Officer.

This past March I was honored by our Board of Directors to be named the fourth CEO in our Company's rich, 26-year history.

While Steve Odland's departure was unanticipated, I'm excited by the opportunity.

I would like to take a moment to personally thank Steve for his leadership and wish him continued success.

I've worked for AutoZone over the last 10 years.

During that time, I have run a division of our stores, I've been responsible for [inaudible] the supply chain and information technology organizations, and most recently, I've been responsible for all store operations in our commercial business.

So, I have the unique perspective of first-hand knowledge of many aspects of our business and I understand the power of our culture of customer service.

I fully understand providing trustworthy advice and having the parts to do the job right are essential to us succeeding as a Company.

I know and understand the awesome responsibility of our store managers and their teams.

And just to reinforce that, over the last two months since assuming the role of CEO, I have been in many, many of our stores across the country.

I'd also like to point out that it's not about me; we have a superb bench of executive talent and I'm excited to lead the best management team in the industry into the future.

Now, since I've begun my role as CEO, I've been asked many times, what's going to change?

The answer is, we'll always have change.

Everything at AutoZone is constantly changing.

We test new possibilities all the time.

But what's not changing is our dedication to providing the kinds of things that made this Company the industry leader.

That's a focus on trustworthy advice and availability of parts.

What our AutoZoners practice every day in our stores is nothing short of remarkable.

Our people practice things like, drop-stop 30/30, widager [ph], go the extra mile, gotcha, all leading to exceptional service in order to have customers remember why shopping at AutoZone is superior.

We know if we do things right and help our customers, they'll keep coming back.

What else hasn't changed?

Our vision and our strategic priorities.

Our vision -- Relentlessly creating the most exciting zone for vehicle solutions.

And our strategic priorities -- First, U.S. retail; second, commercial; and third, Mexico are all still the same.

We remain committed to our goals.

While I could expound here, let me begin discussing our third quarter results and I'll interject my ideas throughout the call.

We are pleased to announce the third quarter continued our trend of record Q3 earnings and earnings per share.

We continued to maintain many of our financial metrics at their highest level since AutoZone became a public company.

For the 12-week quarter, we reported sales of $1.338 billion, a decrease of 1.6% from the third quarter ended May 8th, 2004.

Same-store sales or sales for stores open greater than one year, were down 5% for the quarter.

Gross profit as a percentage of sales for the quarter was up 58 basis points, while operating expenses as a percentage of sales declined by 33 basis points.

This resulted in an operating margin of 19.4%, up 91 basis points from last year's quarter.

Operating profit increased 3% over the prior year.

Net income for the quarter increased to 147.8 million and diluted earnings per share increased 10% to $1.86 from $1.68 in the year-ago quarter.

Excluding last year's warranty credits, net income was up 8% and earnings per share were up 16%.

Our disciplined capital management resulted in return on invested capital for the trailing quarters -- trailing four quarters of 24.5%.

For every incremental dollar invested in the business, AutoZone continues to significantly exceed its cost-to-capital.

We have not and we will not deviate from our efforts to optimize shareholder value over the long-term.

We continue to be physically prudent with our capital investments while optimizing our earnings per share.

Now I'd like to talk about DIY sales I'm going to start with profitable sales matter.

We've continued to drive profits and we're focused on driving sales.

We've performed a great deal of customer research and customer intercepts.

Our customers have told us to focus on the basics, which are already in our pledge -- AutoZoners always put customers first.

We know our products and products, our stores look great and we have the best merchandise at right price.

We are very focused on enhancing the customer experience.

Some initiatives that are currently being launched include -- Improving the shopping experience by optimizing our off-shelf merchandise placements.

This includes reducing the number of displays to improve the customer flow, ensuring the products are compelling and are focused on our core customers.

Additionally, we will be reducing the fringe products for sale in our stores.

We are building cohesive and comprehensive messages throughout the store focused on specific things, like helping customers perform routine maintenance to improve their gas mileage.

We've introduced the new Loyalty Program to recognize and reward our very best customers.

And we've expanded our hours of operations and added AutoZoners at peak times during this, our peak selling season.

We are very focused on continuing to provide the best shopping experience in our industry.

We've listened to our 50,000 AutoZoners.

In short, we are going to focus intensely on the basics.

Simply put, superior execution on customer service.

For the quarter, total retail sales were down 2% versus last year.

I wanted to take a moment here and address the point of gas prices that we had mentioned on last quarter's call.

We continue to see the correlation of gas prices to our same-store sales.

We've noticed over the last three fiscal quarters that as prices have fluctuated, foot traffic was affected in our stores.

Likewise, while February's miles driven were reported as a 1.7% increase over the previous February, March started showing a decline again.

In fact, total miles driven increased modestly in March to a 0.4% overall rate.

This continues to validate the statistical correlation between gas prices and miles driven and our same-store sales report.

Now, while gas prices are important, the most important things we are focusing on are those things that we can control.

Finally, we mentioned last quarter that our inventory levels were too low.

We've needed to put more late-model parts coverage into the stores.

Our store level inventories finished at $498,000 per store, including POS merchandise, up from 465,000 per store in last year's quarter on a total inventory level.

This represents a slight increase from last quarter.

We are determined to invest in the single most important driver to both attracting and retaining our customers' parts coverage.

We will continue to focus on having the right merchandise available by individual store location to satisfy our customers.

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

So what were some of our successes this quarter?

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

We also pursued some other tactics.

Over the last couple of quarters, AutoZone has mentioned how the Company has been managing many projects to create opportunities to grow sales and manage expenses effectively.

These projects continue to contribute millions of dollars to our EBIT.

Let me update you on a few of these.

We rolled out a new multi-use retail display fixture to all our stores that support our off-shelf promotions.

Today, these fixtures exist in all our domestic stores and we continue to see their investment as easily exceeding our 15% after-tax hurdle rate.

We expanded late-model parts coverage, and through our nationwide rollout of Project Got It, we've expanded OE coverage, salvage coverage, crash parts coverage and import parts coverage.

To give an update on how Project Got It has faired under this initiative, the parts coverage in our catalog has more than doubled to roughly 750,000 items available on either a same or next-day basis.

We are encouraged by preliminary findings, however, this is a new endeavor for us and we continue to improve our offering to ensure we say yes to our customers.

This expanded coverage will absolutely both support -- support both our DIY and commercial customers going forward and we're very excited about the future of this program.

We continue to pursue our vision of vehicle solutions provider by placing more parts in the hands of more customers on a timely basis.

Stay tuned for updates on this initiative in the future.

On the Customer Service front, we continued our ongoing initiative to increase the number of ASE-certified AutoZoners throughout the organization.

We continue to challenge all our AutoZoners to become certified in order to better support their customers.

We continued our strategy of establishing a good, better, best delineation for many product categories.

We have now rolled this strategy across roughly 118 merchandise categories with more to come.

Our propriety brands represent a distinctive point of differentiation for AutoZone and help build gross margin.

Customers can only get some of the most trusted brands in America, Valuecraft, Duralast, and Duralast Gold, at AutoZone, driving loyalty and incremental store traffic while giving our customers choices.

We continue to take advantage of trends by introducing new automotive products to optimize sales and profits, but these new products will be more focused on our core categories of merchandise.

Just some examples of this include our new line of microfiber cleaning materials and tire cleaning materials.

By continuing to keep the product assortment fresh and exciting, especially around the entrances to our stores, we feel we are helping to create the most exciting zone for our customers.

For the trailing four quarters, sales per square foot were $252.

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

Our new stores are on track to achieve at least a 15% IRR and we continue to see an opportunity to open thousands of additional stores in the United States.

We opened 33 new stores in the quarter for a total of 3,505 domestic stores.

We continue tracking to approximately 6% square footage growth for the Company.

We also relocated two stores this past quarter, making four stores year-to-date and we continue to see opportunities to expand on this initiative in the future.

Let's talk about commercial.

For the quarter, total commercial sales were down 5% from last quarter.

We now have a commercial program in 2,052 stores supported by 122 hub stores.

The last three quarters sales performance for commercial has clearly not been up to our aspirations.

What's been happening with our program?

Simply put, we've been very focused over the last three quarters on refining our model and making our commercial programs run more profitably.

Can this business be the kind of growth business we have expected it to be for the last several quarters?

Yes.

Commercial can and will be a wonderful growth vehicle for us.

We're working on two very exciting things to help us execute in the upcoming quarters.

We've rolled out hand-held PDAs to all our commercial stores.

These devices allow much more accurate reporting on delivery metrics than we've ever had.

Additionally, they help to remove the conflict around invoicing disputes.

This device allows all the steps of the commercial transaction to be time-stamped for greater accuracy and evaluation.

Secondly, we've begun to roll out a new merchandising and marketing program that is focused on our very best customers.

While all selling programs focus on increasing overall sales, this initiative is around increasing the share of business done by these key customers.

While the initiative is just beginning and we are not discussing specifics, we are encouraged by our findings thus far.

Our model is differentiated by our unique, high-quality brands, our ability to service customers efficiently and effectively, and finally, our national footprint overlay for many chain customers.

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

With only about 1.5% of the commercial sector's business, AutoZone still has significant opportunity to gain market share.

We can continue to grow and add shareholder value over time.

Lastly, let me address the subject of AutoZone's market share in both DIY and commercial segments.

We have been disappointed with our sales results, considering the continued growth in the overall industry.

That being said, our objective is to optimize sales and profits.

To do this, we have to win on customer service by providing our world-famous trustworthy advice.

Our culture is what differentiates us, and it will continue to do so into the future.

Our Mexico stores continued to perform well.

We opened six stores during the quarter, which now gives us 73 stores in Mexico, compared with 3,505 in the United States.

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

Gross profit for the quarter was 50.3% of sales, up 58 basis points from the previous year's quarter.

Contributing to this increase was the same ongoing initiatives we've had in place for many quarters now.

We continue to be successful in partnering with our vendors to offer the right products at the right prices to our customers.

This effort includes -- Supply chain initiatives; tailoring merchandise mix; the continued implementation of our good, better, best product lines, all allowing us to price our products appropriately and give our customers choices.

Additionally, I wanted to remind everyone of our multi-year effort to move warranty liability up the supply chain to our vendors where the costs are lower.

The Company experienced no gain from warranty negotiations during the quarter.

However, for the third quarter last year, the Company experienced a warranty gain of 10.6 million or $0.08 a share.

Excluding the warranty gains from last year's quarter, gross margins were up 136 basis points.

And lastly, in the fourth quarter of fiscal 2004, warranty negotiations resulted in a pre-tax gain to operating profit of 15.5 million or $0.12 per share as we relieved AutoZone of that future liability and lowered the risk profile for the Company.

At the end of Q3, we still have roughly 2 million of remaining liability, which means we have substantially completed our initiative to remove this risk.

We believe there continues to be some margin expansion opportunity, albeit at a slower pace than the previous couple of years.

Those efforts have been at the forefront in our industry, and we believe we continue to have opportunities in working with our vendors to lower costs and provide the best selection of merchandise for our customers at the right prices.

One example is our initiative to do more direct importing of merchandise from foreign suppliers.

Up to this point, AutoZone has bought virtually all its goods from U.S. vendors that may or may not be buying from foreign sources.

Our initiative is to reduce our costs by going straight to the manufacturer, where appropriate.

It is important to note that we have driven our gross margin improvements over the last several years without recording any LIFO benefits.

As of May 7th, 2005, AutoZone had an unrecorded LIFO credit of 178 million.

SG&A for the quarter was 30.9% of sales, down 33 basis points from last year.

The majority of the basis point decrease was due to our ongoing initiatives to reduce expenses.

We continue to focus on initiatives to reduce operating expenses on a percent-to-sales basis.

Store payroll and full-time/part-time ratios have been managed consistently to reflect the seasonal demands of the business.

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

We utilize part-time AutoZoners to flex our staffing up at peak times.

Over the past year, approximately 60% of headcount has been full-time, consistent with the past several quarters.

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

As usual, we look to ramp up our marketing campaigns as we head into our peak selling season, but we expect vendor support to neutralize any negative impact to operating profit.

We continue to relentlessly manage our costs.

We have implemented many projects that have allowed us to lower costs over time and pass the savings onto our shareholders.

Again, I'd like to thank our entire organization for the continued efforts to efficiently manage our resources.

Cost control will be a continued focus for us.

EBIT for the quarter was 259 million, up 3.2% over last year.

Interest expense for the quarter was 24.2 million, compared with 21.9 million a year ago.

Debt outstanding at the end of the quarter was $1.915 billion, versus $1.799 billion last year.

Our debt levels were maintained in line with our guide of 2.1 times our trailing 12-month EBITDAR.

We have purposefully managed our capital structure relative to our cash flow in order to maintain our credit ratings and investment rate while optimizing our cost to capital.

For the quarter, our tax rate was 37.2%, down from 37.5% last year.

Net income for the quarter was of 147.8 million was up 3.1% over the prior year.

Earnings per share for the quarter of $1.86 were up 10% from 79.5 million diluted shares.

But again, excluding last year's unique warranty credits, earnings per share were up 16%.

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

Mike?

Thanks, Bill, and good morning, everyone.

This quarter we generated $302 million of operating cash flow.

For the third quarter this year, we reported another industry-leading return on invested capital of 24.5%, as we've continued to focus on this true driver for the creation of shareholder value over the long-term.

Going through some of the balance sheet highlights, inventory per store is reflected on the balance sheet, which excludes pay-on-scan inventory, was 458,000 versus last year's 447,000.

The increase has been sequential over several quarters now and we feel having the additional goods are what's necessary in order for us to continue to maintain a strategic advantage.

What was impressive was our inventory per-store net of payables, which was actually down to 59,000 per store from 74,000 per store.

The net inventory drives our working capital and is a very important metric for our company.

We also increased net inventory turns in the quarter based on the ending gross inventory to 13.8 times versus 11.6 times last year.

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

Our goal continues to be to achieve 100% AP-to-inventory over time, and I'm excited to say we gave back to our shareholders much of the working capital investment we had placed on the balance sheet last quarter.

While still not at 100%, we're well on our way.

This quarter we reached a total of $141 million of inventory on pay-on-scan, which in accordance with GAAP, is not reflected on our balance sheet.

As stated previously, pay-on-scan or POS, is about aligning the interests of vendors and AutoZone.

These same vendors represent several hundred million dollars of inventory, which we expect to convert to pay-on-scan over time.

Today we have approximately 20% of our vendors on pay-on-scan.

We expect this initiative to continue to gain traction over time.

As with the last quarter, we continue to use the following terms to describe the inventory levels -- Gross inventory is used to define the inventory, excluding pay-on-scan, which is actually the balance sheet inventory; the net inventory is used to define the gross inventory, less the accounts payable.

Pay-on-scan is just one more tool in AutoZone's tool box to help us achieve that stated goal of 100% AP-to-inventory over time.

As we continue to increase the dollars of inventory on pay-on-scan, we may report reduced inventory per store statistics into the future.

This continues to be a benefit to our working capital numbers.

However, I want to point out that we expect to continue to add inventory and SKUs where appropriate, but to have the incremental costs offset by either accounts payable or pay-on-scan.

As stated earlier, we'll continue to only invest in inventory that exceeds our 15% IRR hurdle rate.

We believe the car model proliferation in this sector requires us to continue to add this inventory.

You recall that two-thirds of our inventory continues to have an on-hand of only one.

And as cars are staying on the road longer and longer, we need to carry all those additional SKUs to satisfy the demand.

Total working capital at end of the quarter was at $95 million, versus last quarter's balance of $209 million, reflecting our focus on cash flow.

Net fixed assets were up in the quarter versus last year about 7%.

CapEx for the quarter totalled $68 million and reflects the additional expenditures required to open 33 new stores in this quarter, maintenance on our existing stores, and work on the development of new stores for our upcoming quarters.

Depreciation and amortization totalled $25 million for the quarter.

Our debt by the end of the quarter was 1.915 billion, an increase of $13 million from the prior quarter, as we continued to manage our adjusted debt, including the leases to the 2.1 times EBITDAR.

At this point, I'd like to talk a little bit about our ongoing share repurchase program.

As we've always stated, we focus on that 2.1 times leverage ratio as the metric to determine the amount of stock we're able to purchase in any given quarter.

This past quarter we repurchased 3.2 million shares of our common stock, that's 4% of our outstanding in one quarter alone, as we continue to find this investment easily accretive to earnings at current market prices.

With these trends, EBITDA to interest coverage is now 11.4 times for the trailing 12 months.

As of May 7th, 2005, AutoZone continues to be one of the few players in our industry to have investment-grade ratings.

Senior unsecured debt rating from S&P is BBB+ with a CP rating of A-2.

Moody's Investor Service has a senior secured credit rating on AutoZone of BAA-2 and a CP rating of P-2.

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

Turning to AutoZone's planned strategy toward expensing stock options.

During December of '04, the FASB issued statement 123-R on share-based payments, which requires companies to measure unrecognized compensation expense for all stock-based payments at their fair value.

Stock-based payments will include stock option grants and certain transactions under other company stock plans.

The Company plans to adopt this pronouncement on August 20th, 2005, which is the beginning of the next fiscal year.

I'd like to take a final moment here and talk on the subject of book equity.

Stockholder's equity increased to $300 million in the quarter.

Our return on equity for the trailing four quarters was 205% versus 131% in the quarter.

While those numbers sound great, we don't look at that very much and don't ascribe a lot of performance to that as we've continued to buy back our shares of common stock, which has the impact of reducing the equity.

We manage our debt and our capital structure not to book equity, but to the cash flows, specifically, the 2.1 times EBITDA leverage ratio that I mentioned earlier.

We do this because we believe it to be a more accurate reflection of the leverage and the appropriate capital structure for this business.

Now I'll turn it back to Bill.

Thank you, Mike.

This past quarter we optimized our business model in the face of the continued challenging sales environment.

Our AutoZoners performed exceptionally well with all that was asked of them, from our new project-guided initiative to our senior management change, our organization performed professionally and efficiently.

We have an incredible organization with an awesome culture.

We understand the challenges of what things like gas prices can represent to our customers who fix their cars themselves, as they can not afford to have it done for them.

We remain very optimistic heading into our selling season, as we will focus on continuing to educate our customers on doing those simple things that, while preventive, can mean great savings down the road.

Also, as more and more of our kind of vehicles are on the road every day, we continue to be bullish about our future.

While others in our industry may report stronger quarterly same-store sales, we know there are things we can and will be doing that can improve our results.

On a per-square-foot basis, our stores continue to lead the industry.

Our internal marketing research continues to point to AutoZone as being the destination for DIY customers to buy their auto parts.

While our commercial business was a slight drag on our overall comp store number, we continued to refine our commercial model and remain excited about the future of this business.

Our financial model continues to be strong, as we have continued to increase earnings and operating cash flow while simultaneously improving our business model by removing risks associated with the interest rate fluctuations and warranty liability over a long periods of time.

This consistency in cash flows will be our on-going focus.

We have accomplished this during both strong and weak economies.

We've called our business a-cyclical and still believe it is.

We believe we have many initiatives that can help us profitably grow same-store sales over time, but we budget conservatively to ensure that we maintain both our expense and capital structure disciplines to ensure we deliver solid returns.

This was clearly evident in our ability to drive another strong 16% increase in comparable EPS as our comps fell below our expectations.

I'd just like to reiterate, while sales are very important, profitable sales are more important.

We certainly believe we can drive both effectively into the future.

We continue to be able to boast strong EPS growth rates.

While we certainly cannot guarantee this rate into the future, we know that we have the best model and the best team in the industry.

Repurchasing stock has been a tool in managing our capital structure and we will continue to repurchase stock as long as it is accretive.

We know we have an outstanding business, and as long as we feel our share repurchase program is accretive to earnings, we will use our excess cash flow after our capital expenditure needs to repurchase shares.

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 continue to demonstrate industry-leading financial metrics, being an extremely disciplined Company, we have proven our abilities to manage costs appropriately and invest in incremental projects that exceed our stated 15% after-tax IRR hurdle rate.

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

Again, I'm honored to sit before you today presenting as the new President and Chief Executive Officer of such an incredible company as AutoZone.

I look forward to keeping you abreast of our results well into the future.

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

Thank you.

We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

First question comes from John Tomlinson of Prudential.

Your line is open.

Good morning, guys.

Good morning.

To stay in line with the two questions, the first question is, can you expand on the initiatives in commercial that you're currently evaluating?

And are we at the end of the decline in the number of commercial programs?

Okay.

We continue to evaluate the number of commercial programs.

We have closed some, as you noticed in our numbers that we reported this morning, but overall, that evaluation is completed.

Over time, as we continue to open new stores, we anticipate that some of those new stores will have the commercial program.

Our expectation is that about two-thirds of the stores over time will have the commercial program.

Some stores, it doesn't make sense, there's not enough market around that store within a three-mile radius of that store to have the program, and in other cases it's more effective and efficient to service those customers from another store.

As far as some of the commercial initiatives, I spoke about our PDAs, which have been launched -- were launched in February.

Those are terrific devices that give our drivers the ability to efficiently service their customers.

It also gives us the ability to efficiently manage our program and make sure that we are allocating the right resources to the right places.

We also talked about our new marketing and merchandising initiative, but I said that I wasn't going to give any specifics on that and I'm going to stick with that, John.

And then maybe can you just as a follow-up, give me what -- or talk about the percentage of your full-time employees that are ASE certified?

And where do you think you could take that percentage?

Well, we've had over 5,000 certifications in ASE certifications across the Company.

Where can we take it?

I don't know.

We continue to push it, in fact, I sat for the ASE certification test in May and sat with roughly 40 AutoZoners in Memphis taking the test.

So we continue to push that test because we think it gives -- one, it gives our AutoZoners a reason to make sure their parts knowledge is where it needs to be; secondly, it gives us a third-party assessment that says we do have great parts knowledge.

All right.

Thank you very much.

Thank you.

Thank you.

Next, Matthew Fassler of Goldman Sachs, your line is open.

Thanks a lot.

Good morning.

Good morning.

The first question I'd like to ask, Bill, just taking a broad look at the operations of the business in the stores, you talked about a number of initiatives and they all sound quite promising.

We also know that the organization wasn't standing still, I would think in prior quarters when the sales line started to come under pressure.

So, if you could perhaps capture for us, if there were some areas where you think the Company might have been missing the boat and costing itself some sales.

If you could talk to what you think those were and what about those practices or disciplines you would hope to change as you start your tenure?

Well, Matt, I spoke earlier about -- our focus is to really focus on enhancing the customer shopping experience.

I talked about some initiatives.

One of the initiatives was making sure that we're optimizing our off-shelf placements, in some respects, making sure we don't have clutter in the stores, so our stores are crisp.

The second part of it is making sure that our AutoZoners are keenly focused on customer service.

It's embedded in their culture.

We have great AutoZoners, we've got to make sure and reinforce the cultural practices.

Things like drop-stop 30/30, things like widager [ph], go the extra mile, and gotcha.

Those are what this incredible Company was built on, that's the foundation of this Company, and that's what we're going to have to continue going forward.

As far as missteps in the past, we continue to work to make sure that we improve the things we think are going to drive it in the future.

Understood.

Just to follow up on your answer, I hear you on the various disciplines that AutoZone has executed on over a long period of time.

What are the -- how are you going to work to instill that back into the culture?

How do you intend to intensify training, kind of build that [inaudible] to where perhaps it used to be?

We're going to continue with some of our training initiatives, and in some respects we're going to increase some of our training initiatives.

We have something called "wit" meetings, where we get the store teams together in our stores and that's one of the things -- that's where we get our cultural messages across.

We're going to make sure that those wit meetings are focused on our customer service and our culture of customer service.

Got you.

One quick follow-up.

On the financial side, your expenses per store continue to decline rather sharply.

Now, I realize that that's certainly helping you drive higher earnings.

At the same time, how do you expect or talk to us about how you think you're going to intensify some of these initiatives within those fairly ridged cost disciplines?

Well, I'll talk to the expenses side of that, Matt.

Sure.

And we've been very successful at driving down our expense per store.

We talked about it on the call as being a percentage of sales, but you're right, even on a per-store basis it is down, and that's through our relentless focus on making sure we take out any unnecessary expenses.

So it's not focused on taking away from the trustworthy advice.

In fact, quite the opposite.

We're making sure that we're investing where we need to in order to make sure that we're driving that level of service higher, that we're driving the trustworthy advice.

So where we've been successful in taking it out is everywhere except what is facing the customer.

So in other words, payroll has not been declining as a percent of sales?

That is correct.

Okay.

Thanks so much.

Thank you.

Next, David Schick of Legg Mason.

Your line is open.

Hi, good morning.

Good morning.

You talked about the reducing fringe products and displays, some changes in the displays in the stores.

Could you talk about what impact that had in the testing of that program?

And then second, you mentioned briefly at the beginning, a loyalty program.

If you could talk about some of the parameters of that and how we should expect to see that roll out?

That would be helpful.

I don't want to spend a lot of time talking about the specifics of our Loyalty Program.

What it is is it's focused on our very best customers and continuing to encourage them to come into our stores more frequently.

It has just been rolled out in recent weeks and we're very excited about the possibilities of it in the future.

It's clearly been tested several times and we think it's going to be a nice improvement to our model.

As far as --.

I'm sorry, anybody can join that or it's selected?

You said it's your best customers, I'm trying to understand.

Anybody can join.

Anybody can join it.

Okay.

As far as reducing fringe products, if you go in our stores today, one of the things that you'll notice is that we've made a significant shift in what our off-shelf placements are about.

The products that are on our off-shelf placements are [inaudible] our customers.

They're things like Black Magic car care chemicals, they're things like brake fluid and brake parts cleaner.

They're impulse items that our core customers buy on a routine basis.

Okay, and this has just been rolled out -- this has gone from a test to more broad group of stores?

It's been in evolution over the last several months.

Okay.

Okay, thank you.

Thank you, David.

Thank you.

Next, Matt Nemer of Thomas Weisel Partners, your line is open.

Good morning.

Good morning, Matt.

My first question is, can you comment on the sales of some of the new inventory that you added, the late-model OE, the salvage, and the crash?

I realize it hasn't been that long, but I'm just wondering what the take rate on those new products are.

Well, I'm not going to talk specifics about what we're seeing in those specific categories, but what we are doing is we're seeing that our customers are buying those products, and it gives us the ability to -- the key part of that program is that it gives us the ability to say "yes" to our customers and be able to satisfy needs that they have.

When they come -- when they need something for auto parts, I want them to come to AutoZone.

I want to deepen the relationship that we have with those customers and that's what that's about.

As I mentioned, it's a new endeavor for us, and in some respects, we're continuing to refine that offering, but we think it's going to be a great offering for the future.

Just as a follow-up, do you have the change in the number of products available?

I think you mentioned it was 750 on a same-day or next-day basis.

What is that quarter-over-quarter or year-over-year?

It's clearly more than double.

Okay.

And then second question is, can you rank or quantify the impact of gross margins on either a change in the amount of private label products that you have in the mix, other changes in the mix, or any large vendor rebates in the quarter?

Okay.

I'll take that, Matt.

It's really been a whole bunch of smaller things.

It's focusing category by category on good, better, best.

There's been a number of supply chain initiatives that we've taken on that have gotten our transportation more efficient.

And as we continue to focus on the category management opportunities and we keep rolling category by category, there's some embedded, what would look like pricing improvements, but it's just gross margin improvements as we roll through the category management process.

So that's been the lion's share of what's really driven the gross margin improvements.

Okay, thanks very much.

Thank you.

Thank you.

Next question, Chris Jones of Oppenheimer, your line is open.

Thank you.

Two quick questions.

In terms to the follow-up to the proprietary brands, can you just give us an idea of what that represented in total sales and where you think that can go?

Also, with the minus 5% comp, if you could just talk about where you felt that the most, was it a decline in customer traffic or was it a decline in average ticket?

Thank you.

Sure.

Thank you, Chris.

On your first question on private labels, we've said in the past that our private label offerings combined represent more than 50% of our sales and that number continues to grow.

We're very excited about what our private label offerings are.

As I mentioned before, those brands: Valuecraft, Duralast, and Duralast Gold, are becoming some of the most trusted brands in all the automotive after-market, and we're going to continue to push that and look forward to the future for it.

Second question --?

On traffic versus ticket, and what we've said was that our decline was entirely due to the decline in traffic.

Okay, thank you.

All right.

Thank you.

Next, David Cumberland of Robert W. Baird.

Your line is open.

Thanks.

Good morning.

On advertising, before netting against any vendor funding, did advertising increase in Q3, and did you have more newspaper circulars in Q3 than you had had say in Q3, '04?

Our overall advertising expenses for the quarter on a gross basis increased slightly over last year.

We did do a couple of things this quarter.

One was we introduced the ROB (ph) ads, which were three-quarter-page ads on two successful Thursday afternoons in major metropolitan papers across the country.

We also ran one full circular in the quarter, right at end of the quarter, in some respects it lapped over into the first part of this year.

We remain committed to finding new and innovative ways to touch our customers.

We are very excited about our radio advertising, our TV advertising, and in some respects, we continue to test print advertising.

Thank you.

Thank you.

Next, Scot Ciccarelli of RBC Capital Markets.

Your line is open.

Two questions.

First, if you were to look at your store base on an age basis, is there much of a difference?

Because obviously, you do have some older stores, I mean could that be impacting the comp on a disproportionate basis?

The way we've looked at it and we have a lot of data points, as you could imagine, with 3,500 streams of data from all the stores, and age certainly accounts for something, but it's in the range of a couple of hundred basis points.

And I think the more important thing is what Bill talked about, which is we're focusing on the things that we can control, and the things that we still have opportunities to be able to drive sales, because yes, we've been focused on the profits and we've delivered on that, but we also know that we need to deliver on the sales and then let the profitable sales flow.

Okay.

And second, when you guys look at your commercial customers, you've obviously scaled back the commercial operation in a number of stores.

I'm sure it's had something to do with your ROIC hurdle rates.

Do you think -- can you give us an idea or a better feel for how you go about that evaluation specifically?

What kind of timeframe do you provide customers to kind of achieve a certain threshold of profitability?

Well, our store decisions are based on market analysis, where we go out and do an extensive market analysis of what's available in the three-mile radius of that store.

And so then we make a determination of whether or not that program can support that.

What you've seen over time is some consolidations really, of stores that are basically within the same trade areas and we can effectively service those customers from one store rather than two stores.

Commercial is our second largest strategic priority and we're going to remain committed to growing it over the long-term.

We want to make sure that we continue to grow it profitably.

But do you see any resistance from your commercial customers when you close down the commercial operation, one, because I don't know, they had a relationship with that store or they feel like the other store is too far?

Well, certainly in some respects, we do.

I mean, if we have a customer that's eight miles away from the store, we can't efficiently provide our great service to that customer.

It's not going to be possible.

So what we want to make sure that we do is that we are able to select the customers that we can provide great service to and grow our sales with them over the long-term.

Okay.

Great, thanks, guys.

Thank you very much.

Thank you.

Next, Alan Rifkin of Lehman Brothers.

Your line is open.

Couple questions if I may.

First concerns commercial.

Bill, can you help me better understand that with the number of doors that you guys have relative to the whole industry, and given the fact that your DIY sales are multiples of where your commercial business is today, why are you not seeing greater improvements in commercial, just simply due to the number of outlets out there?

I mean, I would think that it's such an early stage in the program, we will have seen this part of the business increase significantly.

Can you help me better understand that?

I'd have to start, Alan, with, we have certainly been disappointed with our commercial sales performance over the last three quarters.

Now, in some respects, we had a tendency to chase some unprofitable sales.

We're going too far outside of our service radius and those are not sustainable sales over the long-term.

We also chase, as I mentioned, chase some sales through aggressive pricing, which isn't sustainable.

What's important in this business, delivery reliability is the key attribute that our customers want.

They want quality parts, which we've got.

They want knowledgeable people, which we've got.

We've got to make sure that we focus on delivery reliability and focus on that trade area where we can satisfy those customers and turn those deliveries around in 30 minutes.

Okay.

The second question concerns SG&A.

Your full-time equivalents essentially being equal to where it was before, going forward, what incremental opportunities on the SG&A line do you envision?

And with gas prices now coming down for the past five weeks on a sequential basis, all other things being held constant, should we see a sequential pickup in your business due to that alone?

Couple things there, Alan.

First of all on the SG&A front, we still continue to see opportunities to continue to drive SG&A out of the business.

So over the short-term, we still see opportunities to improve our SG&A as a percentage of sales, even without comparable store sales increases, but recognize that over the long-term, we need about 1 or 2% comp points in order to continue to get SG&A leverage.

Now, that's long-term.

Short term we still see some opportunities there.

And there's no silver bullet in there.

It's the hard process of going through, contract by contract, issue by issue, expense by expense, and making sure that we're as sharp as we can, that we put things out to bid all the time, that we focus on what's really necessary for us to be doing, particularly here at the corporate office, because we're not the ones who are out there selling parts, giving the customers service.

So we are keenly focused on where we can take costs out of the business.

We still see opportunities there.

The second piece that you mentioned was on the gas prices, and yes, what we've said is that our gas prices do correlate to our comparable store sales, and it is a very near-term correlation, so therefore, if gas prices decline, we believe that that would be a positive not only for the overall industry, but also for the AutoZone business model in particular.

So we've seen it on the negative side, and we think that it also exists on the positive side.

Okay.

So we should see a sequential pick up in your business then, just given the fact that gasoline prices have come down for the past five, six weeks?

Well, all I say is five, six weeks does not make a quarter, so that by itself would be a positive for us and for the industry.

Thank you, Mike.

Thank you, Alan.

Thank you.

The last question comes from Reed Anderson of Friedman, Billings, Ramsey.

Your line is open.

Just a follow-up for Bill.

You talked a bit about your desire to want to push out on more of the direct importing side.

Can you expand on that comment a little bit?

I'm assuming you're referring more to hard parts?

Then also from a timing standpoint, is that something we might we see some progress on this year, this coming fiscal year?

Okay, thanks, Reed.

Yes, this is the first time we've talked about direct importing.

We've gotten some benefits from our vendors importing from foreign sources over time, but this is the first time that we're making a concerted effort to go and look at potential direct sourcing ourselves.

When you ask what the timing is, certainly we won't get the benefits in this quarter, but we do anticipate seeing the benefits in fiscal 2006.

I think it's a great opportunity.

You mentioned that is it just focused on hard parts?

And it's absolutely not focused on hard parts.

There's a lot of neat, new innovations that are coming out of foreign sources, and we're excited about exploiting some of those opportunities as well.

Great, thanks.

Thank you, Reed.

I think we're getting close on time here, operator.

What I'd like to do is turn it back to Bill to make some closing comments here.

Well, I would just like to take a moment and reiterate that AutoZone has been built on a strong foundation of disciplined processes, all focused on delivering great customer service.

Our commitment is to continue to evolve our practices and culture to ensure we deliver great service to our customers while optimizing long-term shareholder value.

I'd like to thank you very much for participating in today's call and look forward to talking to you in the future.

Thank you.

That concludes today's conference.

You may disconnect.