汽車地帶 (AZO) 2006 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

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, position, strategy, and similar expressions.

These are based on assumptions and assessments 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 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 it 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 as of only the date made.

Except as required by applicable law we undertake to obligation to update publicly any forward-looking statements whether a result of new information, future events, or otherwise.

Actual results may materially differ from anticipated results.

Please refer to the risk factor section of the Form 10-K for the fiscal year ended August 27, 2005 for more information related to these risks.

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

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

This is the conference call to discuss AutoZone's first 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 will end promptly at 10:00 a.m. central time, 11:00 a.m. eastern time.

Mr. Rhodes, you may now begin.

Good morning.

And thank you for joining us today for AutoZone's fiscal 2006 first quarter conference call.

With me today is Brian Campbell, Vice president of Investor Relations and tax.

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

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

Please click on quarterly earnings conference calls to see them.

Now, let's go into the results.

I am pleased to share with you the Company's fiscal 2006 first quarter results.

During the quarter, we completed the rollout of many initiatives designed to improve our customer's shopping experience.

While the full benefit from these initiatives was not immediate, we are pleased with our progress to date.

This resulted in improved sales trends, but lower operating profit and operating margins.

We remain focused on managing our financial metrics, while appropriately building a stronger platform for future profitable earnings growth.

I am extremely proud of our AutoZoners and their efforts, through three hurricanes, and all their aftermath, our AutoZoners performed with a renewed sense of effort and pride, that permeated throughout the organization.

For the 12-week quarter, we reported sales of 1.338 billion, an increase of 4% from last year's first quarter.

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

Gross profit as a percentage of sales for the quarter was up 72 basis points, while operating expenses as a percentage of sales increased by 220 basis points.

This resulted in an operating margin of 15.3%, down 148 basis points from last year's quarter.

Operating profit decreased 5.1% versus the prior year.

During the quarter, we experienced additional expenses associated with the hurricanes and the introduction of FAS 123-R share-based payments.

Excluding these operating -- excluding these items, operating profit decreased 2.1%.

Net income for the quarter was 114 million, and diluted earnings per share decreased 2% to $1.48 from $1.52 in the year ago quarter.

Excluding this year's expenses related to the hurricanes and option expense recognition, net income was down 3.3%, while earnings per share were up 1.2%.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 23.2%.

We continued to ensure every incremental dollar invested in the business generates returns that significantly exceed our 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 physically prudent with our investments while optimizing our earnings per share.

Now, I would like to talk about DIY sales.

Total domestic retail sales were up 4% for the quarter.

During this quarter, we continued to focus on driving sales and profits over the long term.

Our customer research and sales results over the past two quarters continued to reaffirm that -- 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 AutoZone pledge.

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

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

First, I stress that we were working to improve the customer shopping experience by optimizing both the number of off-shelf merchandise placements, and sales floor product placements.

This included reducing the number of displays to improve customer flow and placing product on our shelves that are compelling and easily obtained based on the job the customer is planning to do.

The results of this initiative have been extremely positive.

Our customer feedback has told us our stores are easier to shop, additionally our AutoZoners have a renewed sense of pride in their stores.

Throughout this quarter, we have reset the sales floor in approximately 2,250 of our stores.

We have provided dedicated resources specifically for this one-time effort.

Besides improving the customer shopping experience, the resets will reduce the costs associated with planogram changes in the future.

We will finish up in the second quarter, and then it is back to business as usual during our busiest selling seasons, the spring and summer.

Second, we have continued to refine and improve our guided 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.

We have significantly improved our ability to provide the right parts for our customers.

Our customers are saying they like what they've seen.

Just one example of these enhancements was the rollout of our performance catalog.

We can now offer an additional 72 -- 79,000-plus SKUs to accessorize vehicles that were not available just last quarter.

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

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

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

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

While the removal of certain nonautomotive inventory has had some negative impact on sales, it was only minimal.

We're focusing on what we do best.

Selling automotive parts and accessories and providing trustworthy advice.

Fourth, I discussed a renewed emphasis on training, including a specific emphasis on our culture.

During the quarter, we held what we called WITTDTJR meetings what it takes to do the job right for all AutoZoners, the meetings focus on our cultural practices to ensure customer satisfaction, focusing on things like Drop/Stop 30/30 where we greet the customer within 30 feet or 30 seconds of entering the store and WITTDTJR, providing our customers, with the parts, products, tools, and advice they need to do the job right.

I'm pleased with the traction we have gained on continuing to build on our very rich culture.

Our efforts will be never-ending.

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

This theme as well, has not and will not change.

We continue to believe if we take care of our customers with the advice and service to help them improve the lives of their vehicles and maximize their mileage, we will be well positioned.

Additionally, we continued with a renewed focus on our Duralast add campaign.

We're continuing to build the Duralast brand and you can only get it at AutoZone.

Our new loyalty card program was created to recognize and reward our very best customers.

Again, we want to be the only auto parts retailers 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 ran consistent with the results of our previous two tests, the program has driven increases in both ticket and traffic, but it continues to be too early in the test life cycle to declare victory.

The first test expired in November.

But we have decided to offer it again for six more months.

Lastly, I talked about expanding the hours of operation at many of our stores, this test has modestly increased our sales, while requiring an investment in store labor.

But it ensures that we are available for our customers when they need us.

This initiative was born of the belief that we must be the most convenient choice our customers have when shopping for automotive parts and accessories.

As I said last quarter, we're listening to our customers, and our 50,000 AutoZoners.

We are focusing intensely on the basics, simply put, excellent customer service and superior execution.

With the recent trend 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.

When prices neared $3 a gallon, for regular unleaded, this was not good for our customers, or our business.

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 impact on our customer's loss in disposable income, and it goes without saying, we're encouraged by gas prices coming down more recently.

During periods of high gas prices, we expect our customers to only be able to temporarily defer maintenance, and ultimately to adjust their spending to take care of deferred maintenance.

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

We believe the warmer weather -- the warmer fall weather helped to offset some of the challenges caused by higher gas price, and the hurricane-related damage.

Regarding miles driven, we saw September slightly down versus last year, however that is not surprising considering the higher prices of fuel.

We also reviewed preliminary October numbers showing a continued slight decrease.

Preliminary November numbers are showing improvement over the previous year.

Let me remind everyone of the two statistics we've always felt correlate most closely to our business performance.

Miles driven, and the number of seven-year-old and older vehicles on the road.

Both have continued to trend in the industry's favor.

We don't like to spend considerable time focusing on the impact of gas prices or weather because neither is 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 service their vehicles.

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 seen any material change in the competitive landscape.

While we have seen some cost increases driven by higher commodity prices, overall, consumer price inflation in Q1 was in the low single digit range.

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

Our inventories finished at $495,000 per store, versus $507,000 per store in last year's quarter.

This represents only a slight decrease from last quarter.

We are 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 guidance 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.

Let me update you on some of our efforts to drive sales.

We continued our strategy of offering good, better, best selection for many product categories.

This involves introducing our own brands.

Our customers have embraced these brands and today, we believe that Duralast and Duralast Gold products are among the strongest in reputation as well as sales volume in the automotive after-market due to their quality and overall value.

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

Just some examples of this include our expanded wiper blade line, replacement hose lines, and additional coverage in ride control.

We will continue to be relentless on innovation.

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

That tool is called Z-Net.

Z-Net is a new and significantly improved version of our parts lookup 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 greater levels of trustworthy advice.

This system is nearing completion and will be piloted this quarter and rolled out to the chain in the second half of this fiscal year.

Finally, we announced this quarter will be renewing our sponsorship with PPC racing, Kenny Wallace and the number 22 car in the Busch series of NASCAR.

This has been our first-ever sponsorship of a NASCAR team and we are pleased with the excitement it has 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 clearly 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 33 new stores in the quarter for a total of 3,612 domestic stores.

Unfortunately, we still have 13 locations closed in the Louisiana, Mississippi, and Texas markets, due to hurricane damage.

Growth in square footage continues to be on pace to run in the mid single digit range for the year.

We also relocated three stores this past quarter and we continue to see opportunities to expand this initiative in the future.

Now let's move to commercial sales.

For the quarter, total commercial sales were down 2% from last year's quarter.

We now have the commercial program in 2,103 stores supported by 123 hub stores.

We have been very focused over the last three quarters on refining our commercial programs to run profitably, and this quarter showed improvement.

Last quarter, I spent time updating everyone on our PDA device rollout.

This tool is allowing us to make technology a core competency in our commercial business, similar to the DIY business.

We're now tracking transactions from their inception to completion, and we're understanding where some of our biggest potential for profitable sales growth exists.

We're acting on this information today.

During the quarter, we launched new tests related to our commercial business.

These tests are focused on leveraging our strengths, and responding to customer feedback.

While these tests are small, and relatively new, we are pleased with our learnings to date.

Our model continues to be differentiated by unique high quality brands, our ability to service our 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 fast replenishment of critical merchandise to support both our commercial and DIY businesses.

While our commercial business has clearly not performed up to our internal expectations over the last several quarters, we believe we have a winning game plan and a team in place to execute that plan.

We will be consistent with our initiatives in this business.

We will build it right for the long term.

Many people have asked me over the last quarter, if this is a much harder situation than previously thought.

I believe there is no reason whatsoever this business should not be a contributor and a strong one at that to our same store sales results over the long term.

If we execute on our objectives, we will succeed sooner rather than later.

This business continues to be a strong profit generator for us, and provides outstanding returns on invested capital.

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.

Briefly talk about Mexico.

Our Mexico stores continue to perform well.

We opened three stores during the quarter, which now gives us 84 stores in Mexico, compared with 3,612 in the U.S.

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

Lastly, let me say that while we had been disappointed with our sales over the past several quarters, I am encouraged by what we accomplished this past quarter.

I'm excited about what I'm hearing from our AutoZoners, and our customers.

I am confident we are on the right track to produce continued superior returns for our shareholders.

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

Brian?

Thank you, Bill.

Regarding gross profits, gross margin for the quarter was 49.0% of sales, up from 48.3% of sales in the previous year's quarter.

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 great value choices.

Additionally I would be remiss if I didn't point out our fuel cost increased over last year's quarter.

This alone represented a 6 basis point decrease to gross margin in Q1.

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

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.

Our initiatives do more -- our initiatives to do more direct importing of merchandise from foreign suppliers, has begun to gain some traction.

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.

We are increasing our efforts to reduce our costs by going straight to the manufacturer where appropriate.

This initiative was launched last year and it will take some time to build.

As we discussed last quarter, we expect to begin seeing the benefits during this fiscal 2006.

SG&A for the quarter was 33.6% of sales.

Up 220 basis points from last year.

The increase was due to several events and specific actions.

A $2.8 million charge or 21 basis points related to charges incurred due to damage in Louisiana, Mississippi, and Texas, from the different hurricanes.

The new $3.7 million charge or 28 basis points related to adoption of the FASB 123-R share-based payments program.

We purposely spent more dollars as well on our stores to address our customers' needs.

This initiative involved expanded hours of operation, ensuring clean, well merchandised stores.

Some investments we are making now don't have a current quarter payback but they are necessary we ensure we provide an excellent experience for our customers to deepen the relationship with them.

Some of these expenses will be ongoing, but others will not.

For example, we spent a substantial amount this quarter resetting our stores.

Removing excess fixtures and resetting sales floor planograms.

Occupancy costs were up materially versus last year as well as reported in our press release, depreciation and rent charges were up.

In fact, a combined 49 basis points as a percentage of sales versus last year.

This was driven by our continued investment in new stores, our own versus lead store mix, higher property tax costs, and maintenance on our existing stores.

Let me stress here we will continue to relentlessly manage our costs and we have implemented many projects that have allowed us to lower costs over time, and pass the savings on to our customers, and shareholders.

We invested in these initiatives because we believe they will help build profitable sales for the future.

We are validating these expenditures through extensive testing and monitoring.

The majority of the spending in the quarter is variable and we are controlling these expenditures.

We will spend appropriately for the long run.

As we said last quarter, we expect these investments to take approximately 6 to 9 months from the end of last quarter to gain traction and we continue to hear -- to adhere to that time line.

While we are encouraged by our early wins, we will have to execute for the remainder of the year to validate our strategy.

Again, I would like to recognize the entire AutoZone organization for their continued efforts to efficiently manage our resources.

Cost control will be a continued focus for us.

EBIT for the quarter was $205 million.

Down 5.1% over last year.

Excluding this year's hurricane-related charges and the adoption of FASB 123-R, EBIT for the quarter was down 2.1% versus last year.

Interest expense for the quarter was $23.7 million, compared with $21.8 million a year ago.

Debt outstanding at the end of the quarter was $1.790 billion, or approximately $35 million less than last year.

The increase in interest expense reflects both the ongoing effort to term out the Company's debt on a long term basis as well as the year-over-year increase in 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 our cash flow in order to maintain our credit ratings at investment grade while optimizing our cost of capital.

For the quarter, our tax rate was 37.0%, equal to last year.

Net income for the quarter was $114 million, down 6.7% over the prior year.

Earnings per share for the quarter of 1.48 were down 2%, on 77.2 million diluted shares.

But again, this year's hurricane and share-based option expensing excluding those items, earnings per share were up 1.2%.

Regarding the cash flow and balance sheet, in the first quarter, we generated $128 million of operating cash flow, and repurchased $9.8 million of AutoZone stock as part of our stock repurchase program.

We will continue to repurchase stock as long as it accretive to earnings and consistent with our 2.1 times adjusted debt to EBITDAR liquidity target.

For the first quarter of this year, we reported yet another industry leading ROIC of 23.2%.

Looking at the balance sheet, inventory per store on the balance sheet which excludes pay-on scan inventory was $455,000, versus Q1 of last year, of $464,000.

Accounts payable as a percent of gross inventory finished the quarter at 90.1%, slightly below 91.5% last year.

We fully expect to improve on this ratio by the end of this fiscal year.

This quarter, we reached a total of $149 million of inventory on payment scan which in accordance with GAAP is not reflected on our balance sheet.

As we have stated previously, pay-on scan is about aligning the interest of vendors and AutoZone and is one of the programs we used to achieve our financial goals.

Total working capital was $156 million, versus last year's quarter balance of $118 million.

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

Net fixed assets were up 8% versus last year, capital expenditures for the quarter totaled 58 million, and reflect the additional expenditures required to open 36 new stores in this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters.

Depreciation expense, it totaled $31 million for the quarter.

As of November 19, 2005, AutoZone continues to be one of the few players in our industry to have an investment grade debt rating.

Our senior unsecured debt rating for Standard & Poor's is BBB+ and we have a commercial paper rating of A2.

Moody's investor service has assigned us a senior unsecured credit rating of Baa2 and a commercial paper rating of P2.

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

Now, I will turn it back over to Bill.

Thank you, Brian.

Let me take a moment and comment on the hurricane-related events of this past quarter.

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

As a result of these storms, over 160 of our AutoZoners lost their homes.

We 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 had over 180 AutoZoners working in other stores all across the country.

We also utilized 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 storms.

Sadly, 13 stores remain closed due to the damage suffered.

While we experienced some financial impact from the storms, I cannot tell you how proud I am of all of our AutoZoners for their extensive efforts to get back to some semblance of normalcy after these awful storms passed.

I would also like to address an announcement we made a few weeks ago, regarding our distribution facility in Lafayette, Louisiana.

We announced to our AutoZoners in that facility that we would be closing it in January.

This event will affect the lives of approximately 300 AutoZoners.

However, we have and will continue to work with each and every AutoZoner and have offered each of them the opportunity to relocate to our distribution center in Terrell, Texas.

The decision to close this facility was appropriate from a cost perspective.

We will be transitioning most of the stores previously serviced by Lafayette to the new Terrell DC and we will be able to absorb that increased volume without disruption.

I would personally like to thank our AutoZoners in Lafayette for their great service to our stores over the past 14 years.

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

This quarter, we experienced some improvements in our trends.

We have launched many 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.

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.

Customer service is our key point of differentiation.

And AutoZoners across the Company are committed to providing that service to every customer.

Let me say we must continue to make AutoZone the best place to shop, as well as a great place to work for our AutoZoners.

It's simple.

It is about treating people with respect, and in return, results will follow.

As I noted earlier, we are making investments now that we expect will deliver improved results over the long term.

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

How do we know?

We know because as always, they've been tested.

We have an incredible organization, and a very, very proud culture.

We are pleased with our AutoZoners renewed commitment to our culture, that they exhibited this past quarter.

We remain optimistic about the future, as we will focus on continuing to educate our customers on doing those simple things that while preventative, 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 very bullish about our future.

We believe our business is acyclical.

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

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

We have the best management team in the industry.

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.

I thank you today for letting us share with you our company's past accomplishments and touching on our exciting new initiatives.

I'll 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. [OPERATOR INSTRUCTIONS] Our first question comes from John Lawrence with Morgan Keegan.

You may ask your question.

Bill, can you comment just a little bit more, I don't know, Brian if you can go one more step into the SG&A a little bit, and just give us a little more feel as to how much of that -- that spending of 40, $45 million, X the charges, how much continues, how much -- what can you -- just go one step further on that, please?

Well, John, as we've mentioned on the call, some of it was directly related to resetting our stores.

That portion will not continue.

It will continue in the second quarter, as we finish that initiative.

But the rest of it will continue.

And some of it is specifically related to these initiatives that we talked about, and then some of it is the growth in new stores as we highlighted on occupancy expenses.

But we are very, very excited about resetting the stores.

We've reset 2250 stores in the quarter, and when you walk into those stores, they all look and feel exactly the same.

And it is much easier for our AutoZoners to know where our products are, and it is much easier for our customers to know where our products are.

I am very excited about what that is going to mean to our future.

And once again, I know you don't want to give the amount, but is that the magnitude or a small amount of that increase?

It was a significant amount, but it certainly wasn't the biggest portion of it.

Okay.

Thanks.

Thank you.

Our next question comes from Bill Sims with Citigroup.

You may ask your question.

Bill, just a follow-up on the resets.

Can you give us a little more color in terms of -- were these in car store resets how disruptive, if it was at all, were the resets, what was your strategy, in terms of picking the first 2250 stores?

Was it geographically based?

The oldest stores?

Can you give us any color there?

Okay.

Terrific.

Let me address why we did it.

Over the last several years, many of our stores had become -- they put different planograms in different places.

We had an initiative to go and merchandise the stores in the stores so some of the store managers put things in different places and we also had hundreds if not thousands of different prototypes.

We made the decision that we wanted our stores to look and feel exactly the same.

So our store operations team took the initiative on themselves to go out and reset them all.

They were not geographically determined.

They were determined by each individual district manager.

So the majority -- a district manager has done 60 or 70% of their stores.

What they do is they reset the entire sales force.

All of the gondolas to make sure the right merchandise is in the right place on the gondolas.

So when you walk into a wide prototype store, all the merchandise is in the same place in all the wide prototype stores.

When you walk into a narrow prototype store, all of the merchandise is in the same place in those prototype stores.

Was it disruptive?

Yes, it was a little bit disruptive, Bill, but I don't want to overstate that.

Our team really did a remarkable job of resetting them.

They did a lot of it at night.

And they did a lot of it in off-hours with specific crews that were dedicated to completing that project.

My second question is starting in the fourth quarter you started increasing staffing levels, you increased the hours.

Where do we stand at that?

Are you now comfortable with the staffing levels in the store or the hours raised at all the stores you wanted to be increased?

And then other than the system's upgrade in the back half of fiscal '06, are there any other incremental expenses we should come to expect?

Are we comfortable with where our staffing levels are?

Today we're comfortable with them but this is retail and every day we're trying different things we try higher levels of service -- or of labor, we try lower levels of labor to make sure that we have always got it right.

We have launched all of the initiatives as of the end of of the quarter that we intended to launch.

They were staggered somewhat throughout the quarter but at the end of the quarter they have all been launched.

My final question is Bill, you have been at the helm now for a little over two quarters I believe, how are things going relative to your initial expectations, relative to your plans?

Are they going better, the same, or slightly worse than were you planning?

I didn't have a lot of time to create that plan.

I was -- I wasn't planning to be in this role on March the 12th, and on March the 13th, I was, so it wasn't really something I sat down and reflected on a tremendous amount.

I will tell you I am very proud of what we're doing.

I'm very proud of our AutoZoners.

We have a wonderful management team from our executive committee and our CEO team all the way down into our stores.

I am very excited by what I hear from our store operators, from being in our stores, they're excited about what they're doing, they understand what our strategy is, they embrace our strategy, and they're out executing our plan.

All right.

Thank you very much.

Congratulations.

Thank you.

Thank you.

Our next question comes from Matthew Fassler.

You may ask your question.

Goldman Sachs.

I would like to ask you just a couple of questions.

First of all, following up on the labor question, if you forget for a moment about the resets and the costs and hours associated with that and also about the extra store operating hours and just sort of think on a comp basis, can you say whether your payroll hours on the store are up versus the prior year?

We haven't given specific guidance on specific payroll hours, Matt, and I don't really want to get into that because we constantly managed our payroll based upon the trends that we're seeing in the business each and every week, so I don't want to get into a routine of communicating whether payroll was up or down and we kind of had a history of not doing that.

I can tell you that I am very comfortable with the payroll that we are spending in our stores today.

I think it is the right amount.

But let me ask you another sort of related question then.

If you look at the increase in SG&A dollars, did some of that reflect increases in say fuel costs and energy costs and related nonlabor items that seem to be rising from the entire marketplace?

Unquestionably.

It wasn't the broader part of it, but there are clearly some inflationary pressures from energy costs and the like.

Got you.

Okay.

Just a couple of others.

On the buyback front, obviously you're buying back stock commensurate with your targeted levels of debt coverage.

Based on your plan, is it your expectation that you will be able to buy back stock over the course of this year?

Without a doubt.

What we said is we have two governors on our stock repurchase program, one governor is 2.1 times EBITDAR and the other governor is, as long as it is accretive to earnings.

It is clearly very accretive to earnings at these levels.

But as you've seen, over time, and this quarter was not inconsistent with what you saw last quarter, the first and second quarters are our seasonably low cash flow quarters.

The third and the fourth quarter are where we generate a tremendous amount of cash.

We are absolutely committed to our share repurchase program.

And it has provided a lot of value over a long period of time.

Got you.

And finally, can you give us any update on new progress in naming a CFO?

We have initiated a search.

I think we put it in a press release about six or seven weeks ago.

I'm pleased with the progress that we're making on the search but don't have an announcement that is imminent at this point in time.

Understood.

Thanks a lot.

I also want to say, I am very proud of our finance team that we have in place here.

We have a great group of finance leaders and they are doing a fantastic job.

And so I'm not in any rush, I certainly want to hurry up and get it done, but I'm also very comfortable with the team that we have in place, and really want to thank them for stepping up, and leading the finance organization over these last couple of months.

Got you.

Thank you so much.

Thank you, Matt.

Thank you.

Our next question comes from Matt Nemer with Thomas Weisel Partners.

You may ask your question.

The first question is, on proprietary brands, can you give us an update on what percentage that is of the mix, and where you think that can go?

Yes, Matt.

We have said over time that our proprietary brands represent over 50% of our sales.

And that really hasn't changed that significantly.

It has grown a little bit in recent months.

I think there is this misperception out there that we have evolved into this private label house, we call it our brands where we were all using national brands before, and that's simply not the case.

What we've done over the last 18 months or so is we have migrated a bunch of brands that didn't -- that were so small, they didn't have any meaning in our stores so nobody knew they existed but they were proprietary brands at that point in time and we have taken those brands and rolled them into Duralast and Duralast Gold brands so many categories before, we had Deutsche oil and air filters, well, those are gone now, we had Ultra Spark, spark plug wires, those are now Duralast spark plug wires, we had Albany brake pads which are now Duralast brake pads so it is pulling all of those, in some respects, meaningless brands into one powerful brand that we can communicate the qualities of those brands to our customers so they have great meaning with them.

And then just to follow up on the new product that you've introduced, in your stores, how big is the -- are the catalog sales for you right now?

Is that -- I know you've introduced a performance catalog. lower log, I think you have a salvage catalog, how big of a piece is that?

We haven't specifically disclosed that but I can tell you I am very excited with what we've done -- we call it "project got it" and we're continuing to find more ways that we can say yes to our customers.

First of all, it gives us that sale at that point in time when the customer is in our stores but it also -- our main objective is to make sure that we're the only store our customer shops.

And if we ever say no to them, then they're going to have to go fill their needs somewhere else.

So "project to it" is about making sure we say yes and we deepen the relationship that we have with those customers.

And then lastly, can you give us some guidance on the break down between ticket and traffic this quarter?

Our ticket continues to grow.

Our traffic was down slightly.

But we're pleased with the trends that we're seeing in our traffic as well.

Great.

Thanks so much.

Thank you.

Our next question comes from David Cumberland with Robert Baird.

You may ask your question.

Thanks.

A couple of questions on the commercial business.

The number of stores was unchanged from the end of Q4.

Do you expect to add programs in fiscal '06?

And then also in commercial, you mentioned some tests.

What types of things are you trying in the commercial business?

Our commercial store count didn't change during the quarter.

We continue to look for different ways to make sure that we have the right programs in the right places.

We think we do right now.

But we also don't want to open a bunch of commercial programs going into the winter selling season.

It is our least profitable selling season, especially on the commercial side of the business, so we don't look to ramp up commercial stores as we go into the winter.

We will be continuing with our assessment of which stores need to be on the commercial program as we go into the spring, and we will continue to open new programs during the -- as far as the specific test, I'm not going to get into too many specifics, it is too early to tell, but our team went back and said okay, what are all the different things that we need to do to improve this business.

And we're trying those in a couple of different markets, and we will see how they do.

I'm very excited from what we've learned to date and look forward to taking the learnings and rolling them into our commercial program across the country.

Great.

And one other question, on the loyalty program, planning for that, for six more months, are you making any changes for the program from the first version?

I think the only thing that changed was the picture that was on the loyalty card so that it looks a little bit different.

It was launched on December the 1st.

It is in stores now, if you want to go see it.

But it is the same program.

Five punches, five purchases of $20 or more equates to a $20 gift certificate.

We've been very pleased with the performance of the loyalty card so far.

It is giving people a reason to come back into our stores more frequently.

And at this point in time, when we're proud of what we're doing in our stores, we want them to keep coming back and getting new experiences.

Thank you.

Thank you.

Thank you.

Our next question comes from Greg Melich with Morgan Stanley.

You may ask your question.

Hi, thanks.

I have two questions.

One was just to make sure I got the numbers right on the resets.

It was 2200 stores that you did during the quarter?

Approximately, Greg.

The number was 2,250 stores.

Approximately.

And then the rest will be done in the second quarter?

Correct.

And were all the stores done -- were there any that were done late last year or were they pretty much all in the first quarter?

No, pretty much all in the first quarter.

Okay.

And then the--.

For the second question, they were -- the majority of them were done later in the quarter.

Okay.

Toward the back part, great.

Is the working capital and the payables ratio, if you just look at the free cash flow in the quarter, and I guess what resulted in lower share buyback, a lot of it was that being up also versus a year ago.

Could you just describe why the payables drip down a little bit versus inventory?

Sure.

Again, our goal by the end of the year is obviously to continue to improve on the payables ratio, and we expect to be driving towards that.

In the quarter, it was just seasonality, Greg.

There wasn't anything special.

It was based on the mix of goods that were sold.

And the process.

And we were close to the number of last year, but again, we look to show improvement.

So it was nothing more than seasonality with accounts payable to inventory.

We have our goal of reaching 100% accounts payable to inventory, and that is -- we have every option and initiative to go forward to get that number.

Great.

And did any direct sourcing have any influence on that?

I think that it is still early in the process, while we've reached out,and started to do due diligence on the initiative, it has had some early impacts but it is very early, still.

We expect that initiative to just gain traction as the year goes on.

All right.

But that didn't have any impact on working capital?

Not materially.

Okay.

Thanks.

Thank you.

Our next question comes from Jerry Marks with Raymond James.

You may ask your question.

How much of the purchases that you have come from overseas?

You said it is pretty negligible right now and how much do you expect that to go to?

Well, first of all, we haven't disclosed exactly what the percentage of purchases that come from overseas are today, but understand, as far as us direct importing, virtually that number is zero.

Now, we have started some over the last couple of quarters but it is very insignificant at this point in time.

Now, that being said, we have many people that are buying things, are buying products overseas, and selling them to us, so we have gained some portion of the benefit over time by encouraging our vendors to move their manufacturing facilities over there or finding importers who can do that for us.

But what we're doing now is looking at certain opportunities where we can directly import it, and cut out the middle person.

And I mean any idea in terms of with the year-over-year improvement in gross margin, how much of that came from -- would you say the bulk of the improvement came from these initiatives of you trying to push your vendors overseas and move more towards overseas?

No, I wouldn't -- Jerry, it would still be premature.

That is an initiative that is just beginning at this point.

No, it is just the standard process of us working with our vendor community, and sales mix, to grow our margins.

Okay.

Did I hear right, Brian, did you mention that rent charges were up 49 basis points -- added 49 basis points to your SG&A on a year-over-year basis?

Did you guys increase your percent of lease versus owned?

Over the last year and a half or so the rent-to-own mix has changed.

A lot of that has driven by where the new store openings have been.

In the northeast and on the West Coast where it has more of a challenge for us to find purchased property, we have been leasing and what we have said was a combination of rent and depreciation expense was up 49 basis points, a combination of the two of those.

Oh, okay.

So are you guys maybe down like 65%, lease versus owned now?

Yes, approximately -- just under -- around 65%, that is exactly right.

And last question.

Bill, you kind of talked about your customer research in the commercial end of the market being more towards those customers saying the biggest thing that they care about is reliability.

Have you done any research toward the actual end customer who shops those repair shops and what they're looking for, because it just seems to me like there is that -- that they're missing out on the opportunity of realizing how much lower cost they could get if they were buying from AutoZone?

I think that is a great point.

No, we haven't done specific research of our end consumer -- of the ultimate end consumer from the shops.

We have spent a lot of time working with our partners, our customer partners, on how we can help them improve their business.

And clearly, one of the things that we continue to reinforce with them is using us will, one, give you high quality products, great service, but also lower economics, -- or improved economics, that's one of the things that we talk about a lot of times when people talk about our brands versus the national brands.

I'm a big believer in over the long term economics win, and when we can provide our products at the same or better values for lower costs, over the long term economics are going to win.

Okay.

Got you.

Thanks.

Thank you.

Thank you.

Our next question comes from Alan Rifkin from Lehman Brothers.

You may ask your question.

Yes, hi, it's actually Brad Thomas for Alan.

Most of my questions have been answered but just wanted to follow up quickly on some of the sales.

You had talked about the commodity prices being up low single digits.

I was wondering if you had had any benefit from inflation in your comps?

Not materially.

It was -- while there are certain corrections on certain lines to the overall mix it was not a material impact.

Okay.

Then I know you all continue to talk about having a correlation in your business with gasoline prices.

Would it be fair to believe then that your business accelerated towards the end of the quarter?

We have not provided guidance on run rates throughout the quarters.

What we have said is that gas prices, we continue to see correlation but we're just continuing -- we more firmly believe that as long as we execute on the initiatives that we have in place, working with our customers, we can provide a solid opportunity for growth in the future.

But we have not given the guidance on performance throughout the quarter.

Okay.

Then just lastly, any comments geographically on areas of weakness or strength?

Yes, Brad, we have a practice of not discussing individual regional differences, but what I can tell you is we've been pleased with the improvements we've seen across the country.

Okay.

All right.

Great, well, thank you very much.

Thank you, Brad.

Thank you, our next question comes from Cid Wilson with Kevin Dann Partners.

You may ask your question.

Hi, good morning.

Most of my questions have been answered as well but just two.

First, is can you touch a little more on your strategy regarding your -- keeping within that adjusted debt to EBITDAR, because this one had came at 2.0 times and it looks like you paid down some debt and the follow-up is what your -- what your strategy is in the event of a rise in interest rates?

Okay.

A couple of different questions there.

First, it did come out at 2.0, Cid, but I think it is 2.047, and these two quarters are our seasonably lowest quarters for cash flow.

So we want to make sure that we stick within our guide of 2.1 times EBITDAR.

So it is very close.

It wasn't anything specific other than making sure that we were in good shape as we go into the second quarter.

Second question regarding interest rate fluctuations, if you look at our debt, about 85% of our debt is fixed today.

So certainly, over the medium term we're hedged well against any rises in interest rates.

Okay.

And then my actual second question is, if you can touch a little more on your advertising strategy, as it relates to Duralast, and any color in terms of the cost and what we can expect going forward?

Well, we rolled out a new Duralast battery commercial during the latter part of the summer.

And early into this quarter.

And it is a fantastic commercial.

We have been very pleased with the results of that commercial.

And I think it is airing in a market near you today.

So we're continuing to find different ways to build the Duralast brand.

It is a great brand.

They are great products.

And they're very well received by our customers.

So we're going to continue to exploit that brand by telling the consumer how powerful it is.

Any color on the cost in terms of how much you're spending now versus a year ago?

Not materially different.

Just in different places.

What we want to do is make sure that we -- it is not about how much we spend, but how effective we spend it.

And we're doing some different things to make sure that we hit our customers in different ways.

And I mean the whole Kenny Wallace number 22 Busch car is a different way to go hit our customers, and clearly, I went to a couple of races this year, clearly, that is very focused on our core customer.

And it is hitting them in a different way than we have ever hit them before.

Focusing on Duralast, that is another new way to hit them rather than the same messages.

So I'm very excited.

I'm very pleased with what our marketing department has done from those various marketing initiatives to the loyalty card program.

Okay.

Thank you very much.

Thank you, Cid.

Thank you.

Our next question comes from Michael Cox with Piper Jaffray.

You may ask your question.

My only question here is on the Z-Net system upgrade.

I was wondering if you could provide some additional details how that differs from the previous parts lookup system you had in your stores?

Well, our parts lookup system that we have in our stores today is a green screen.

I will tell you, it is a very powerful tool.

It has more information, more robust information behind it than any other tool that I've seen in the marketplace.

It is a very intuitive and very easy for someone to learn but it is based on green screen technology.

Our new Z-Net tool is going to be based on the latest and greatest technologies, XML, GUI interface, those kinds of things and what those advances in technology do is allow us to provide even stronger information for our customers and our AutoZoners.

We can provide graphics, we can provide diagrams, we can deploy more specific repair information and it will allow us to use ALLDATA in our stores as well.

So we're very excited about it.

It is going to be -- it is going to beta test this quarter and then be rolled out sometime later in the second half of the year.

All right.

Thank you very much.

All right.

Thank you.

Thank you.

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

You may ask your question.

One clarifying item, first.

Option expense, should we see comparable levels in the next few quarters?

Yes.

In fact -- Scot, good morning.

Hi, Brian.

An indication reviewing last year is your best guidepost for this year's option exposure.

So if -- in our footnotes we pro forma from the previous year's 10-Qs what our expense exposure would be and we encourage you to look at those numbers.

Okay, that's fine.

Also, can you guys help me understand a little bit better the difference between the remodels that you've previously referenced and the resets and are the resets in addition to the remodels, is the remodel program still going on or this is instead of?

Just help me understand what is incremental and what is kind of just a continuation of?

There are actually two completely different programs, Scott.

A remodel is we will go in and change the tile in the store and we will change the layout of the store and we will change out parts counters and make them into parts pods, those kinds of things so it is a fairly extensive remodel of the whole store.

I almost said reset.

But the resets are taking the planograms that are in the stores and putting them in the same exact place in every individual AutoZone store that is set on that prototype.

So it is like setting our wiper blades on the insides of the gondola in every store that is set to a wide prototype.

It is about setting the tools on a high gondola in every store that is second high gondola in every store, and what has happened, especially when we went back and made our gondolas higher, in some cases, we had categories that were designed to be on a low gondola but they're actually set on a high gondolas, so the AutoZoners had to spread the merchandise out.

So it was not a very compelling presentation to the customer.

With this initiative, all of those issues are done.

And so that -- the cost for a reset is significantly less than it is for a remodel?

Oh, yes.

Okay.

All right.

That's all I had.

Thank you.

Thank you, Scott.

Okay.

Before we conclude the call, I would like to take a moment to reiterate that we know we have an incredible business built on a strong foundation of disciplined processes, focused on delivering great customer service.

As we continue to focus on the basics, we are confident that we will continue to be incredibly successful while continuing to optimize long-term shareholder value.

I want to thank each of you for participating in today's call.

And look forward to talking to you soon.

Wish you all very happy holidays.

Thank you.

And that ends today's conference.

At this time you may disconnect your lines.