汽車地帶 (AZO) 2005 Q4 法說會逐字稿

Good morning and thank you all for holding.

This is the conference call to discuss AutoZone's fourth-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 AM Central, 11 Eastern Time.

I would also like to inform all parties that this call is being recorded; if you have any objections to please disconnect.

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

Certain statements contained in this press release are forward-looking statements.

Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, and similar expressions.

These are based on assumptions and assessments made by the 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 uncertainties including, without limitation, competition, product demand, the economy, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, 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 could materially and adversely affect our business.

Forward-looking statements speak only as of the date made.

Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements that are the result of new information, future events or otherwise.

Actual results may materially differ from anticipated results.

Please refer to the Risk Factors section of AutoZone's Form 10-K for the fiscal year ended August 28, 2004, for more information related to those risks.

Thank you.

Mr. Rhodes, you may now begin.

Thank you.

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

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

I hope you have had an opportunity to read our press release and learn about the fourth quarter's and full-year results.

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

Please click on quarterly earnings conference calls to see them.

We are pleased to announce the fourth quarter continued our trend of record Q4 earnings per share.

During this quarter, we remained focused on managing our financial metrics, while appropriately building a stronger platform for future profitable earnings growth.

For the 16-week quarter, we reported sales of 1.882 billion, an increase of 2.5% from the fourth quarter ended August 28, 2004.

Same store sales, or sales for stores open greater than one year, were down 1% for the quarter.

Gross profit as a percentage of sales for the quarter was down 51 basis points, while operating expenses as a percent of sales increased by 65 basis points.

This resulted in an operating margin of 18.7%, down 116 basis points from last year's quarter.

Operating profit decreased 3.5% over the prior year.

Within gross profit last year, we had a $15.5 million gain associated with warranty reversals.

Excluding this gain from warranty negotiations in the prior year, operating profit was up 1%.

Net income for the quarter was $207 million, and diluted earnings per share increased 5% to $2.66 from $2.53 in the year-ago quarter.

Excluding last year's warranty credits and this year's onetime tax credits, net income was flat while earnings per share were up 7%.

Our disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 23.9%.

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

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

We continue to be fiscally prudent with our investments, while optimizing our earnings per share.

Now I would like to talk about DIY sales.

Profitable sales matter.

We introduced this phrase last quarter, and we want to reiterate it this quarter.

We have continued our relentless pursuit to drive profits over the long-term.

We performed a great deal of customer research and customer intercepts over the past two quarters, and the results continue to reaffirm what we have always known.

Our customers are looking for us to provide them with trustworthy advice.

Our customers have told us to focus on the basics, which are incorporated within our pledge which says, AutoZoners always put customers first.

We know our parts and products.

Our stores look great, and we have got the best merchandise at the right price.

Based on our pledge, we introduced several new customer service initiatives.

I would like to take a moment and address their successes with you.

First, we have continued to refine and improve our project Got It! initiative that we introduced in February.

This initiative is designed to provide our customers with the broadest offering of parts and accessories to meet their needs.

Simply said, it allows us to say yes to our customers; not only to earn their business on that single purchase, but to deepen our relationship with them.

We have been very pleased with this initiative and continue to see significant opportunities to enhance these offerings well into the future.

Second, I stressed that we are working to improve the customer shopping experience by optimizing the number of off-shelf merchandise placements.

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

The results of this initiative have been extremely positive.

Our customer feedback has reiterated to continue with this approach of removing the clutter from our stores.

When our company was founded, we introduced clean, well-lit, well-merchandised stores.

Ensuring our stores are visually appealing to our customers is critical and continues to be one of our top priorities.

Third, I talked about reducing the amount of fringe items in our stores.

By and large, the goal of this initiative was to reaffirm to our customers that we are a store focused on providing the parts and products they need to maintain and accessorize their vehicles.

While we carry nonautomotive items, we have to make sure we are stocking the right inventory for our core automotive customer.

Our current inventory in stores reflects this initiative, and we'll continue this evolution into fiscal 2006.

Fourth, I discussed a renewed emphasis on training and making sure we have got the appropriate number of AutoZoners in the stores at the right time.

While we know they won't have an immediate return, these are necessary additions to ensure we are providing customers the best shopping experience.

Training has and will continue to focus specifically on our culture.

During the quarter, we held two WITTDTJR meetings for all AutoZoners across the company.

The meetings focus on our cultural practices to ensure customer satisfaction, focusing on things like Drop/Stop 30/30, which is greeting the customer within 30 feet or 30 seconds of entering the store; and WITTDTJR, what it takes to do the job right, providing our customers with the parts, products, tools and advice they need to do the job right.

Fifth, I mentioned we would be building cohesive messages throughout our stores, focused on specific things like helping customers perform routine maintenance to improve their gas mileage.

This theme as well has not and will not change.

With the high price of gas at the pumps, this initiative remains a linchpin in our marketing efforts for next year.

I also talked about our new loyalty program created to recognize and reward our very best customers.

Again, we want to be the only auto parts retailer our customers shop.

We are excited by the results to date and by the potential for this program.

As those of you who know us well understand, we test everything before rolling it nationally, and this program was no different.

The results this past quarter were consistent with the results of our previous test.

The program has driven increases in both ticket and traffic.

But it is too early in the test lifecycle to declare a victory.

Lastly, I talked about expanding the hours of operation at many of our stores.

This test has modestly increased our sales, while requiring some investments in store labor, but it ensures that we are available for our customers when they need us.

We will continue to monitor the progress of this initiative and test other variations, but we will ensure that we are the most convenient choice our customers have when shopping for automotive parts and accessories.

For the quarter, total retail sales were up 2.5% versus last year.

With the recent trends in gas prices, I thought it was important to address the point of higher gas prices and the impact they're having on our business.

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

Yes, with current gas prices on average nearing $3 a gallon, this is not good for our customers.

However, we continue to feel that we can do things to generate sales through internally-generated programs and initiatives that can offset much of the negative impacts on our customers' loss in disposable income.

During the fourth quarter, we estimate that weather had a modest positive impact on our sales, due to warm weather across much of the country.

We have always stated extreme weather conditions are good for business.

And at this time of significant heat, it is no different.

We believe the warm weather helped to offset some of the challenges caused by higher gas prices.

Regarding miles driven, we saw April down 1.5% versus last year.

May and June both showed positive increases.

July's miles driven decreased slightly versus the same time last year.

Look, we don't like to spend considerable time focusing on the impact of gas prices or weather, because neither are controllable by us, and weather impacts will normalize over time.

We do monitor these situations to ensure we are providing our customers with the advice and products they need to optimize their own personal situations.

We believe over the long-term that if we execute our game plan we can overcome any effects of gas prices or weather.

Regarding pricing across the industry, we have not noticed any material change in the competitive landscape.

Inflation within the industry continues to trend at low single digits.

Finally, we have been updating all of you over the last several quarters on our inventory levels per store and what we're doing to insure we have got the right parts available for our customers.

Our inventories finished at $494,000 per store, including pay-on-scan merchandise, up from $490,000 per store in last year's quarter on a total inventory level.

This represents only a slight increase from last quarter.

We're determined to invest in one of the most important drivers to both attracting and retaining our customers, parts coverage.

But we are also focused on making sure we don't have the wrong merchandise in the wrong stores.

Optimizing inventory levels in this business is one of the keys to success.

We continue to leverage our hub stores and project Got It! to ensure we have the parts and products our customers need, while optimizing our returns.

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

Now, let me update you on some of our other efforts to drive profitable sales.

On the customer service front, we continued our ongoing initiative to increase the number of ASE certified AutoZoners throughout the organization.

We're happy to report we're nearing 6,000 certifications.

We continue to challenge all our AutoZoners to become certified in order to provide trustworthy advice.

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

We have now rolled this strategy across roughly 120 merchandise categories with more to come.

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

Customers can get some of the most trusted brands in America, Valucraft, Duralast, Duralast Gold, as well as national brands 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 focused on our core categories of merchandise.

Just some examples of this include our new line of Valucraft CV axles and extensions of our Duralast and Duralast Gold friction coverage.

We are focused on continuing to keep the product assortment fresh and exciting, especially around the entrances to our stores, in order to create the most exciting zone for our customers.

Over the course of 2006, we will be launching a new selling tool in our stores.

That tool is called Z-Net (ph).

Z-Net is a new and significantly improved version of our parts look-up system.

It continues to leverage our unique and robust proprietary parts catalog, while allowing us to leverage some of the recent advances in technology.

This system will ensure the same fast service to our customers, but will also leverage product graphics and detailed repair information, to allow us to provide our customers with trustworthy advice.

This system is nearing completion and will be piloted in the first half of the year and rolled out in the second half of the year.

Finally, during the fourth quarter, we announced that we had become the primary sponsor for the number 22 Kenny Wallace car in the Busch series of NASCAR.

This was our first-ever sponsorship of a NASCAR team, and we are pleased with the excitement it generated in both our customers and our AutoZoners.

As for results, it is too early to tell.

This initiative, as any other, will be monitored to determine its effect on our business.

However, it is one example of how we are trying new innovations to reach our customers, and it is certainly focused on our core customers.

For the trailing four quarters, sales per square foot were $248.

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 87 new stores in the quarter, for a total of 3,592 domestic stores.

For the year, we opened 175 domestic new stores and closed three locations.

We also opened 18 stores in Mexico.

Growth in square footage was approximately 6%, and we will maintain this mid single digit rate in F'06.

With so many stores slated to open at the back end of this fiscal year, we made a conscious decision to utilize our resources on opening the 87 stores for the quarter efficiently and effectively, rather than to race to open more.

This left a handful of unopened sites which will roll over to be opened early in F'06.

We also relocated three stores this past quarter, making seven stores for the year.

We continue to see opportunities to expand this initiative in the future.

Commercial.

For the quarter, total commercial sales were down 4% from last year's quarter.

We now have the commercial program in 2,104 stores supported by 123 hub stores.

We have been very focused over the last three quarters on refining our commercial programs to run profitably.

This quarter continued to show steady improvement, as we opened new programs and began to address sales growth again.

Last quarter I introduced some of the new efforts to improve this business over the long term.

The new handheld PDA devices for our commercial drivers allow us to track the entire transaction from its inception to putting the part in the customer's hands to returning to the store.

We now know more about our customer base and our operational practices than ever before.

Additionally, I talked about the new merchandise and marketing program that was rolled to our commercial programs.

The program effectively promotes the concept of The More You Buy the More You Saved.

This continues to show traction, and we have begun to see additional business from the customers that have migrated to the new program.

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.

Our customer research continues to tell us the most compelling reason we can give a professional customer to use us is delivery reliability.

Simply said, get me the parts I need when you said you would get them to me.

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

With only about 1.5% of the commercial sector's business, we still have significant opportunity to gain market share in this business.

We can and will grow this business over the long term, but we will ensure we do it profitably, to drive shareholder value.

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

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

That being said, our objective is to optimize profitable sales.

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 eight stores during the quarter, which now gives us 81 stores in Mexico, compared with 3,592 in the United States.

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

Now I will turn it over to Mike Archbold to take us through the remainder of the income statement, cash flows, share repurchases, and the balance sheet.

Mike?

Thanks, Bill.

Gross margin for the fourth quarter was 48.7% of sales, down from 49.2% of sales in the previous year's quarter.

However, last year's quarter included a $15.5 million credit for warranty liability reversals that contributed about 90 basis points to gross margin.

So excluding this credit, gross margins expanded in the quarter 33 basis points over the prior year.

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 the 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 would be remiss if I didn't point out fuel costs increased tremendously over last year's quarter.

This alone represented a 5 basis point decreased to gross margin in the quarter.

While last year we hedged a significant portion of our diesel risk at $1.37 a gallon, this year we hedged later in the year at $1.85 a gallon.

We believe there continues to be some margin expansion opportunity going forward, albeit at a slower pace than what we have experienced in the past few years.

These 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.

This initiative was launched at the beginning of this quarter, and it will take some time to build.

As we mentioned last quarter, we expect to begin seeing benefits from this in our fiscal 2006.

Turning to the SG&A side, SG&A for the quarter was 30.0% of sales, which was up 65 basis points from the prior year.

The majority of that basis point increase was due to the growth initiatives Bill mentioned earlier.

We intentionally allocated more dollars to our stores to address our customers' demands.

This initiative involved extended hours of operation, ensuring clean, well-merchandised locations.

Some investments we are making now don't have an immediate payback, but they are necessary to ensure we provide excellent service and deepen the relationship with our customers.

We also spent more on advertising in the fourth quarter than we did in last year's quarter.

Occupancy costs were also up materially versus the prior year.

As reported in our press release, depreciation and rent charges were each up roughly 50 basis points as a percentage of sales versus last year.

This was driven by our continued investment in new stores, our owned versus leased store mix, and the maintenance on our existing stores.

We will continue to relentlessly manage our costs.

We have implemented many projects that have allowed us to lower costs over time and past those savings on to our shareholders.

I would like to add my thanks to Bill's, to 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 therefore $351 million, down 3.5% from the prior year.

Excluding last year's credits for the warranty negotiations, though, EBIT for the quarter was actually up 0.8% over the prior year.

Interest expense for the quarter was 32.8 million compared with 28.7 million in the prior year.

Debt outstanding at the end of the quarter was 1.862 billion versus 1.869 billion.

The increase in interest expense reflects both the ongoing effort to turn out our Company's debt on a long-term basis as well as the year-over-year increase in the short-term rates.

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

We have purposely managed our capital structure relative to the cash flows in order to maintain our credit ratings at investment-grade while optimizing our cost of capital.

Turning to the tax provision for the quarter, our tax rate was 35.1%, down from 37.5% last year.

However, this quarter included a discrete tax benefit of $6 million.

Therefore on a comparable basis, the rate was 37% this year versus 37.5% in the prior year.

Net income for the quarter of 207 million was down 1.3% over the prior year.

Earnings per share for the quarter of 266 were up 5.5% on 77.6 million diluted shares.

Again, excluding last year's unique warranty credits and this year's tax credit, comparable earnings per share were actually up 7.3%.

For the full fiscal year, reported EPS was up 10%, while that comparable EPS was actually up 16% over the prior year.

Now turning to some of our cash flow initiatives, in the fourth quarter we generated $245 million of operating cash flow.

For the fourth quarter of this year, we reported yet another industry-leading ROIC of 23.9% as we continue to focus on the true driver for the creation of shareholder value over the long term.

Looking at the balance sheet, inventory per story as reported on the balance sheet, which excludes pay-on-scan inventory, was 453,000 versus last year's 448,000.

This increase has been sequential over several quarters now.

We believe that having these additional goods are necessary for us to maintain our strategic advantage.

What was also impressive was our inventory per store net of payables, which was down from 38,000 per store last year to 34,000 per store this year.

Net inventory obviously impacts working capital and is a very important metric for us at AutoZone.

Additionally we increased our net inventory turns in the quarter based upon the ending inventory to 23.5 times versus 21.8 times last year.

Our goal is to achieve 100% Accounts Payable to inventory over time; and I'm pleased to report we achieved 92.5% for the quarter, up from 91.5% in the prior year.

We have determined to achieve this 100% goal over the next couple of years.

This quarter, we reached a total of $152 million of inventory on pay-on-scan, which in accordance with GAAP is not reflected on our balance sheet.

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

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

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

Total working capital was at 118 million versus last quarter's balance of 95 million.

We will continue to focus on reducing our working capital, as this reflects our ongoing focus on increasing our cash flow.

With that cash flow from operations, we were able to invest in accordance with our priorities, which is, first, in new stores; second, reinvest in existing stores; and lastly, still return $118 million to our shareholders in the form of stock buybacks, while not increasing the risk profile of the Company.

Net fixed assets were up 8% versus the prior year.

CapEx for the quarter totaled $97 million and reflects the additional expenditures required to open 95 new stores in this quarter, the maintenance on existing stores, and work on development of new stores for upcoming quarters.

Depreciation totaled $39 million in the quarter.

As of the end of our fiscal year, AutoZone continues to be one of the few players in our industry to have investment-grade ratings.

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

Moody's Investors Service has assigned us a senior unsecured debt credit rating of the Baa2 and a CP rating of P-2.

We continue to be comfortable with our debt ratings and leverage ratios and expect to continue to use the investment-grade as a competitive advantage.

Regarding AutoZone's planned strategy towards expensing stock options, in December of 2004, the Financial Accounting Standards Board issued Statement 123R on share-based payments, which requires companies to recognize compensation expense for all stock-based payments at fair value.

The Company plans to adopt this pronouncement at August 28, 2005, which is the first day of our new fiscal year.

While the impact of the adoption of FAS 123R cannot be predicted exactly at this time, because it will depend on, among other things, the level of share-based payments granted in the future, had we adopted FAS 123R in prior periods the impact of that standard would have approximated our disclosure of the pro forma net income and earnings per share in the footnotes to our quarterly and annual financial statements.

Again, while we do not provide guidance, this previous disclosure is a good indicator of the future expense, as we expect to use the Black-Scholes model which was used in the preparation of that footnote disclosure.

With that, I would like to turn it back to Bill for the outlook.

Thank you, Mike.

Let me take a moment and comment on hurricane Katrina.

Our first priority after the storm passed was to focus on locating our AutoZoners, ensuring they were safe, and helping them with their personal recovery efforts.

As a result of this storm, over 160 of our AutoZoners lost their homes.

We have provided extensive support to our AutoZoners, from continuing their pay for those AutoZoners unable to work in the weeks immediately following the storm, to allowing any AutoZoner to work at any AutoZone store across the country.

We have over 150 AutoZoners working at other stores all across the country.

We also reactivated the AutoZoner assistance fund to provide immediate financial assistance to our AutoZoners in need.

In total, we had over 125 stores that were impacted in some form by the storm.

As of today, we still have 18 stores that remain closed.

While we will certainly experience some financial impact from the storm in the first quarter of F'06, we don't anticipate that impact to be material.

We are currently focused on assessing each storm and getting them reopened as quickly as possible.

Now, as I said on last quarter's call, we were disappointed with our sales performance.

This quarter, we experienced some improvement in our trends, but still not satisfactory.

We have launched new initiatives that we believe over the long term will improve our performance.

Many of our initiatives are focused on the basics of our business, which we believe are the most compelling to our customers.

Last week, we held our annual national sales meeting where for three days the leaders of our Company from across the country gathered to launch 2006.

The theme our meeting was Live the Pledge, the same pledge I discussed earlier in this call.

AutoZoners always put customers first.

We know our parts and products.

Our stores look great, and we have got the best merchandise at the right price.

As I said to the leaders of our Company, our business is simple.

Treat our customers right.

Inspire, motivate, and give our AutoZoners the tools they need to succeed and execute flawlessly.

The most powerful tool we have is our unique AutoZone culture.

To others, it may seem trivial.

But to us, it ensures we provide our customers with the service they deserve.

Customer service is our key point differentiation, and AutoZoners across the Company are committed to providing that service to every customer.

As I noted earlier, we are making investments now that we expect will improve our performance over the long term.

Some of those investments will not have immediate payback, but we know they are the right things to do for the long term in this business.

How do we know that?

We know because, as always, they have been tested.

Our AutoZoners continue to perform well with all that we ask of them.

From our new Project Got It! initiative, to our renewed focus on our proud culture and increased levels of customer service, our organization performed professionally and efficiently.

We have an incredible organization and a very proud culture.

We remain very optimistic heading into this new fiscal year 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 higher quarterly same-store sales, on a per square foot basis our stores continue to lead the industry.

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

We continue to refine our commercial model and remained excited about the future of this business.

Again, there's no reason commercial should not be a significant growth vehicle for us in the future.

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

This consistency in cash flows will be our ongoing focus.

We have accomplished this during both strong and weak economies.

We believe our business is acyclical.

We are simply in a stage in our lifecycle where we have to rededicate our organization to focus on the founding principles that brought us wonderful success and will guide us well into the future.

Look, we have all the tools we need to grow profitably for the future.

We have the best management team in all the industry.

We know what we need to do to succeed, and we're getting after it.

We believe we have many initiatives that can help us profitably (technical difficulty) same-store sales over time.

We will maintain both our expense and capital structure disciplines to ensure we deliver solid returns.

This is evident in our ability to drive a 7% increase in comparable EPS as our comps remained below an acceptable level.

I would 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 also 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 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 a disciplined Company, we have proven our abilities to manage costs appropriately and invest in incremental initiatives 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 am honored and proud to sit before you today discussing our Company's past accomplishments and touching on some of the exciting vehicles for growth we have got planned well into the future.

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

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

(OPERATOR INSTRUCTIONS) Bill Sims with Citigroup.

Bill, I understand you have had the opportunities to walk dozens if not hundreds of stores over the past couple of months.

Can you give us your direct assessment of the condition of these stores?

Should we look for an acceleration in investments to improve upon the performance of these stores, thus (ph) deleveraging sales?

Or can we expect an improvement in store productivity without producing sales deleverage or operating margin deleverage?

Thank you.

Yes.

I have traveled to many, many stores in all parts of the country.

I will tell you that I am pleased with the progress that our stores are making.

I talked about some initiatives earlier today, like removing some of the clutter in our stores, making sure that our product placements were focused on the products that speak to our core customers.

I am excited about the progress we are making.

I am also very excited about our AutoZoners commitment to our culture.

Our culture is what differentiates us, and it has over a long period of time.

Now as far as leverage in SG&A, obviously, SG&A -- we had 65 basis point increase in SG&A during the quarter.

Some of that was related to some of the investments that we have made.

As we look forward we are going to continue, as we always do, to make the investments that we need to make to grow this business profitably over the long term.

That 15% hurdle rate stands for capital investments, but it also stands for investments that we make in any other aspect of our business.

So we will continue to optimize our operating margins over the long term.

Just to build on that, Bill, in a nutshell, our operating margins are secure.

They're the highest in the industry for a number of fundamental reasons.

We don't expect that to change.

What we're talking about is some small incremental investments that we are making in customer service.

But in a nutshell, our operating margins are secure.

Mike, just a follow-up.

Can we expect gross margin improvement to offset the SG&A investment, and therefore operating margins showing either flat or up, rather than down, over the next several quarters?

And in the short term can we expect the investment in SG&A to outweigh the gross margin improvement?

As you know, Bill, we don't give that level of guidance.

But we can tell you is from here that we still see operating -- we still see certainly gross margin improvement.

We still see some opportunities to take SG&A out of the business.

But if we see opportunities to invest in SG&A in the short term, knowing that it might take four to six months, as Bill talked about, for us to see the customer service benefits or the sales benefits from that, we expect to continue to do that.

But over the long term, never mind quarter-by-quarter, we still see opportunities for us to be able to improve our operating margin.

One last follow-up.

Can you just quantify the cost of Z-Net POS system, and how and when are you going to account for it?

We have not quantified that publicly.

I can tell you that we expect that system to roll within the quarter, but we don't expect it to be a huge kind of an investment.

So I would say it would be less than 10% of our total capital easily.

It will begin rolling this quarter to some pilot stores.

It will take, as I said earlier, the second half of the year will be the mass rollout to all the stores.

Matthew Fassler with Goldman Sachs.

I would like to ask a couple questions.

First of all, I want to probe a bit into the SG&A investment.

Is the kind of recovery in SG&A spending per store that we saw this quarter symptomatic of what you expect we're going to see?

I believe your dollars were up about 5%.

Your square footage growth was about 5%.

So SG&A per store was flat.

Having been down previously, it's flattish.

Can you get the job done, or is your expectation that you might need to tick that up a little bit on a per store basis as you jumpstart some of the initiatives that you're discussing?

In terms of the -- the only indications that we have given is the SG&A as a rate, as a percentage of sales from where we are now -- and if you notice what we did in this quarter, which as you noted was about 65 basis points -- we expect to make similar types of investments over the short term.

Again keeping in mind that when we make them over the short term, we're not getting those sales, because we only see our customers about every four to six months.

So we expect it to take that amount of time before we see the sales that would offset it.

So as long as we keep finding opportunities to invest in the SG&A, we will keep doing that.

But it is not huge in terms of its investment; and with 18%-plus operating margins like we have gotten in this quarter, we certainly have some opportunity to be able to invest.

Completely understood.

I guess if one were to forecast SG&A and sales differently, and understanding that you can certainly control your expenses yourselves, are to some degree in your control but to some degree out, and we are in a budget, kind of on an expense dollar basis rather than an expense ratio basis, we saw 5% increase in SG&A dollars.

I guess I would ask the question then this way.

Are all of the initiatives that you discussed, or were all the initiatives that you discussed ramped up through the quarter?

Or did they gather momentum in terms of the level of investment through the quarter?

So that as we go into Q1 of the new fiscal year perhaps the year-to-year increase might build a little bit from where we were in Q4.

I will take that.

Some of them were out there for the entire quarter.

Many of them were not out there for the entire quarter.

There's also other things that we're going to do going into this fiscal year.

Some things that are going to take SG&A cost out; and there's going to be some things that add SG&A costs.

We are continuing to refine that, to make sure that we're providing our customers with the service that they deserve.

Understood.

A second question I would like to ask is just on the commercial front.

You spoke quite a bit about continuing to build the direct import business; and obviously that is additive to gross margins.

Bill, what is your view, having sat in the top seat now for a number of months, about your private-label and own-brand assortment, which is in the aggregate I think quite a bit higher than your competition, and where that sits with your commercial clientele?

Are you doing anything on the branded front, perhaps, to reach out to those customers?

Matt, I am very satisfied with our brands and how they translate to our professional customers.

We have some of the most trusted brands in the automotive aftermarket.

The Duralast line, whether it is starters and alternators, brakes, batteries, they continue to be received well by the marketplace.

What I have learned about this marketplace is over the long term, economics win.

If you can provide people with high-quality parts at a good price, they're going to buy them.

Understood.

Finally on the buyback, should we basically continue to think about that 2.1 leverage ratio as being the guide?

You know, the buyback was probably a little less than we thought it would be this quarter, given that this is your peak cash flow quarter.

Should we just kind of manage -- expect you to manage the buyback to that leverage ratio at this point?

Yes, because that is the governor.

We're managing to a targeted capital structure, really a targeted investment-grade rating.

So our priorities are, first, to grow the new stores; second, to invest in the existing stores; and then with whatever cash flow is left over is where we will buy back stocks.

So that is the one that fluctuates in order to make sure that we hit our targeted capital structure.

Mike, I might have missed it, but did you give CapEx guidance for the upcoming year?

We did not.

But we did say a similar mid single digit kind of new store growth rate.

If you assume that is at about $1.1 million per store, plus some discretionary maintenance-type CapEx, plus a little bit for the Z-Net rollout, you will be close.

So there is really no meaningful delta from kind of the year just ended.

It should not be dissimilar to this year's number.

Okay, thank you very much.

Gary Balter with Credit Suisse First Boston.

Just following up a little bit on Matt and Bill's question actually.

I think what we were all trying to get to is we see the investment picking up, which we view as a very big positive actually; but I'm trying to figure out, how do we measure from an analytical point of view when those investments start to pay off?

Like when we could start seeing strong returns on that?

So what we saw this quarter, which was a little bit of shrinkage in the margins doesn't happen.

What we have said is, first of all, we have tested these things over a period of time.

What we said is most of our customers come to our stores every three or four months.

So investments that we make into customer service initiatives are going to take a while to surface.

So you can say if they come every three or four months, it is going to take six months, nine months, something along those lines.

But we know that they are the right things to do.

So the best guidance I can give you is it's going to take six to nine months.

CapEx, we should assume essentially just from Matt's questions, just following up, that it's going to be essentially up about mid single digits from last year?

Is that a fair number?

No, we said a number similar to this year.

If you remember, this year we actually had an investment in distribution; and that is going to kind of be swapped somewhat for the investment that Bill mentioned in the Z-Net infrastructure.

Everybody has been focusing on Katrina and the impacts there.

You are nationwide Company obviously.

Have you seen -- are there other areas of the country that are having either weather issues or other issues that you would want to highlight?

Obviously, Katrina had an effect on everybody.

It had an effect on gas prices.

I know here in Memphis, we certainly felt the effects of it from things like gas prices, to a surge in the number of people, from evacuees that came from New Orleans.

As far as weather effects I haven't really seen any other weather effects.

But it certainly has impacted things, particularly gas prices.

Thank you very much.

Gregory Melich with Morgan Stanley.

David Cumberland with Robert Baird.

A few questions on the loyalty program.

Mike, can you talk about how you are accounting for the projected rewards?

Are you taking a reserve?

Could that reserve have been a bit dilutive to net sales this early in the program?

Yes, let me just go through some quick math with you, David.

First, the way it works is five visits at $20 or more over a six-month period, and you get a $20 gift card.

So the $20 gift card, because it's only good for merchandise, really only costs us about half of that roughly.

So with purchases totaling of $120, we wind up investing $10 in that customer loyalty relationship.

So it is 8% in terms of its dilutive impact.

But keep in mind that it is only with our most loyal customers that we're going to be experiencing that.

Bill mentioned before we typically only see our customer, our average customer, once every three to four months.

This customer we're expecting to see five times over the course of a six-month period.

So it's truly a heavy DIYer is the person that we are attracting here.

It is not the lion's share of our customers that we're doing this with.

That being said, the accounting for this is we have to estimate with each sale what we think the redemption rate will be.

We actually take that as a reduction of our sales, and then that flows through our gross that way.

This is a small investment in our most loyal customers in order to drive incremental traffic as well as incremental ticket.

This puts the AutoZone brand in everybody's wallet with a card, and gives them a reason to drive by our competition and keep coming back to AutoZone.

Another question on the program.

What are your plans to capture and use the customer data?

First of all, we have a tremendous amount of customer data already.

We have a national warranty database, which gives us a tremendous amount of information on our customers, not only where they live and what their phone number is but also on what kind of cars they have, what kind of products do they purchase from us on a routine basis.

So this just expands that customer data even more.

Again on the program, I believe it expires in the next month or two.

Do you plan a follow-up program after (ph) ?

It does expire at the end of November, and we will take a look at the program and decide where to go with it from there.

One separate question.

Can you comment on the progression of comps within the quarter?

Or comment on whether comps picked up in the last part of the quarter with the warmer weather?

We don't disclose intraquarter numbers and we are not a monthly comp releaser.

That being said, we talked about the initiatives that we have been running in the quarter, and that we're happy with the early successes, as Bill mentioned before.

Not all of them were in the entire quarter, but we're beginning to see some of the benefits from those initiatives that we have launched.

Alan Rifkin with Lehman Brothers.

Bill, you mentioned that higher gas prices obviously had a negative impact on your business in the fiscal fourth quarter.

Sequentially, as we look at the beginning of your next fiscal year, I think we would all have to assume that gas prices are going to be a little bit higher certainly than the averages that were reported in Q4.

What proactively, if anything, are you folks doing at the store level to maybe try to manage expenses?

Given that traffic may continue to be below what you would ideally like to have.

Alan, first of all, gas prices are at $3 a gallon; but as I said earlier, I don't want to focus on gas prices.

There's nothing we can do to control them.

What we're focused on is making sure we are delivering great customer service every day in every store.

We have a very robust labor planning model that is in our stores that helps us appropriately set the labor in our stores every day, based upon our most recent trends.

So as gas prices or sales or whatever else changes our sales, we proactively manage those costs every day.

Not just in this time, but every day throughout the year.

Maybe as a follow-up to a couple of earlier questions with respect to your level of investments at the store level and with respect to the training of your associates.

On a sequential basis, are there any assumptions that we can make with respect to those investments intensifying or becoming stable?

Are you hoping to keep them flat as a percent of revenues going forward?

Or should we look at them more stable from an absolute perspective?

Alan, we don't give guidance on that specifically.

But what we have said is that the investments that we are making are not that significant.

So if you look at what we're talking about here in this quarter, it was 65 basis points.

We're starting with an 18% operating margin in this quarter.

And while there is some amount that we think that we can invest in here, somewhere akin to what we had in Q4, but not much more significant than that.

We need to keep doing that, and we will do it everywhere that we see the opportunity to drive incremental sales and incremental profitable sales.

Because we are not trying to optimize or maximize our operating margin here.

We're trying to do everything that we can to drive these incremental sales.

So we're not just trying to drive margins to the moon here.

It is more about the operating profit dollars.

If we can drive incremental operating profit dollars with some incremental investment in SG&A, we will continue to do so.

Okay, thank you, Mike.

Matt Nemer with Thomas Weisel Partners.

My first question is related to gas prices.

You mentioned that you don't want to focus on that.

I am just wondering if you have been able to train your associates to push certain fuel efficiency type products?

And maybe how big is that category?

I guess it would include new air filters and tire pressure monitors.

Is there some kind of an effect that we might see in that category from higher gas prices?

You know, obviously gas prices have been a significant issue for the last 18 months to the consumer.

Yes, we have educated our AutoZoners on how to help their customers improve their fuel mileage.

It is in the things you talk about.

It's also from some things like adding fuel injector cleaner, making sure that you change your air filter, making sure that your car is tuned up using platinum spark plugs to burn fuel more efficiently.

So there are a lot of different things that our AutoZoners do every day in our stores to promote gas prices -- or to promote gas efficiency.

We also have some advertising programs that we have launched that talk to the consumer on coming to AutoZone to get the things that they need to improve their gas mileage.

Care to guess how large that category might be as a percent of sales?

We don't really get into specific category level specifics on how they are as a percentage of sales.

Sticking with energy prices in general, if I look at tracking what you charge for a quart of oil, it looks like your prices are up about 10% over the last six months for, say, Quaker State or Valvoline, which seems to lag the change in price of crude oil.

I am just wondering if you are able to pass on that change to customers or if the vendor is absorbing a lot of that increase?

As you noted, there is a lag between the crude prices and then ultimately when it is reflected in ultimately the cost that goes on our shelves.

But history shows that generally we have been successful at being able to pass those costs increases on to the customer.

The customer clearly knows that oil prices are up and therefore is expecting that there would be an increase in that core price.

So we expect that to continue into the future.

I know you don't comment on individual products, but is that -- it's fair to say that -- is that one of your largest product categories?

Oil?

Yes.

Oil is certainly a very significant category for us, and we know that it drives traffic into our stores.

So we're very cognizant of it and make sure that we stay sharp.

Lastly, on your new store growth, can you comment on any changes in new store productivity and I guess what markets you are focusing on?

Whether you might consider clustering a little bit more given kind of the change in distribution costs?

The new store productivity, all of our new stores in F'04 as well as in F'05 are all on track as a group to meet or exceed our 15% after-tax IRR.

So they continue to perform very well.

The improvements in our business model continue to be able to drive the bottom line and ultimately the IRR on all of our new stores.

So very happy with that.

Specifically on your question regarding clustering of new stores and new markets, first of all, I want to talk about we did open a new market during the quarter; and that market was Puerto Rico.

We opened two stores in Puerto Rico during the quarter and will continue to penetrate that market very rapidly over the near future.

As far as clustering our store openings based on distribution expenses, you have to remember that our distribution network at this point in time is set up to be a national distribution network.

So it is not one where we have to move successively, because we already have the infrastructure in place across the country.

We continue to penetrate new markets, the Northeast, the Northwest, South Florida, where we are underpenetrated.

But we are making sure that we are focused on getting the right site and getting it at the right value.

We're very disciplined about how we select those sites.

Okay, thank you very much.

Cid Wilson with Kevin Dann and Partners.

A couple of questions.

First, can you talk a little bit more about -- I noticed that you increased the number of stores that had commercial sales this quarter.

Of course you decreased it in the last quarter.

Maybe a little more understanding in terms of maybe what is going on regionally or what you are seeing in these stores?

I know you are trying to keep them at that 15% IRR hurdle rate.

But maybe you can give us some more color in terms of what is going on there.

Okay.

As I said on the last call, we had gone through a very robust review of all the stores that were on the program.

And, yes, we did close a significant amount of them.

But we closed them based upon the marketplace that existed in that area; and the other opportunity was -- were there some stores where we could cluster the two stores together?

So we could service the entire marketplace out of one store, making sure we get great service out of that store.

That review was basically completed and executed in the second and third quarters.

During this quarter we also, as you know, have opened 175 new stores this year.

And we're looking at those new stores and the stores we opened last year to see where we have a market that will support our commercial program.

As you mentioned, we do hold everything to a 15% after-tax IRR.

But in the commercial business, it doesn't take a tremendous amount of operating profit to exceed that hurdle rate, because the investments are so low.

So we have opened some new stores during the quarter and we will continue to monitor and open them more (ph) prudently.

Okay.

My next question is, do you have any guidance in terms of where you see pay-on-scan by the end of this current fiscal year 2006?

Is there any range that you are looking for? (multiple speakers) percentage of vendors?

First of all, we are not going to do any specific guidance on pay-on-scan.

Pay-on-scan is one of the tools that we are using.

Our objective is to get to 100% Accounts Payable to inventory ratio.

Pay-on-scan is a great tool that we are using to get there.

We're going to continue to leverage it with our vendors, as Mike said.

There's over 20% of our vendors are on the program today, and the inventory that we have with those vendors represents hundreds of millions of dollars.

So we are excited about the program.

We are continuing to work it with our vendors.

But we're very focused on how do we get to 100% Accounts Payable to inventory ratio.

My last question is, this summer with the surge in new car sales that took place, with all these employee discount promotions that was taking place, can you comment on, in terms of what your plans in terms of inventory coverage?

Given what appears to be a larger percentage of used cars that haven't yet been sold from these trade-ins that have taken place at what appears to be a younger fleet of vehicles that are out there in some areas.

Obviously, the cars that are being sold today in the used market are typically older.

We have already got those products in our stores.

So we believe we have got the right coverage for those cars already today.

As far as all the new cars that were sold, there's been a lot of questions about, is that going to put some headwind on our sales?

And we don't think so.

Really what drives that is whether or not there is scrappage rate on the backside.

We have seen no significant change in scrappage rates over a long period of time.

Okay, since there's not any more questions, I would like to take a moment to reiterate that although we were not satisfied with every aspect of our performance in the fourth quarter, we know we have an incredible business, built on a strong foundation of disciplined processes, 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 in every store every day.

As we do that, we are confident that we will continue to be incredibly successful and will optimize long-term shareholder value.

Thank you very much for participating in today's call.

Thank you and that does conclude today's teleconference call.

Thank you all for joining.