汽車地帶 (AZO) 2006 Q3 法說會逐字稿

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

Bill Rhodes, the Company's President and CEO will be making a short presentation on the highlights of the quarter.

The conference call will end promptly at 10:00 a.m.

Central, 11:00 a.m.

Eastern time.

I would also like to remind all parties today's conference call will be recorded, and all parties will be able to listen only until we open up for questions and answers.

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

Certain statements contained in this presentation are forward-looking statements.

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

These are based on assumptions and assessments made by our management team 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 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 changes in laws or regulations.

Forward-looking statements are not guarantees of future performance and actual results, developments, and business decisions may differ than 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 whether a 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 27, 2005, for more information related to those risks.

In addition to the financial statements presented in accordance with generally accepted accounting principles AutoZone has provided metrics in this presentation that are not calculated in accordance with GAAP.

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

Mr. Rhodes.

You may begin.

Good morning, and thank you for joining us today for AutoZone's fiscal 2006 third quarter conference call.

With me today is Bill Giles, Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President of Investor Relations and Tax.

I'd like to take a moment and personally welcome Bill Giles to the AutoZone team and let everyone know how excited we are to have him as an AutoZoner.

He is a terrific addition to our team, Bill, welcome to AutoZone.

Now, regarding the third quarter I hope you've had an opportunity to read our press release and learn about the 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 to begin, I'd like to start by thanking our entire organization for their efforts in continuing to live the AutoZone pledge.

I am extremely proud of our AutoZoners and their efforts.

The primary initiatives for this fiscal year have been focused on improving the customer shopping experience.

A significant point of emphasis has been placed on AutoZoner training.

We recently completed a survey across our organization that definitively stated that AutoZoners understand their objectives and they were on board with our efforts.

As I visit our stores around the country, I continue to be very encouraged by the improvement in the look and feel of our stores as well as the engagement and high level of commitment of our AutoZoners.

I firmly believe we are on the right track to continue to build this incredible company and deliver strong financial performance.

Regarding the third quarter, for the 12 weeks ended we reported sales of 1.417 billion, an increase of 5.9% from last year's third quarter.

Same-store sales, or sales for stores open greater than one year, were up 2.1% for the quarter.

Gross profit as a percentage of sales for the quarter was down 62 basis points while operating expenses as a percentage of sales increased by 90 basis points.

This resulted in operating margin of 17.9%, down 153 basis points from last year's quarter.

Operating profit decreased 2.4% versus the prior year.

During this year's quarter, we experienced additional expenses associated with the introduction of FASB 123R, share-based payments, at the start of this fiscal year.

Excluding this item operating profit decreased 0.8%.

Net income for the quarter was 144 million, and diluted earnings per share increased 1.4% to $1.89 from $1.86 in the year-ago quarter.

Excluding this year's expenses related to option expense recognition net income was down 0.5% while earnings per share increased 3.3% to $1.92 versus last year at $1.86.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 22.2%.

We have and will continue to make investments in our business that generate 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 fiscally 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 6% 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 three-quarters continue to reaffirm what we've always known.

Our customers shop with us because we provide them with trustworthy advice.

Our customers have told us to focus on the basics, which are incorporated within our AutoZone pledge to both our customers and fellow AutoZoners.

Based on our pledge at the beginning of this fiscal year we introduced several customer service initiatives.

I'd like to take a moment and share several examples of their successes during the third quarter.

First, I stressed that we were working to improve the customer shopping experience by optimizing the number of both 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.

While I mentioned a few moments ago how clearly our AutoZoners understand our mission going forward, our customer feedback continues to improve.

They are telling us our stores are easier to shop and they're enjoying their shopping experience to a much higher degree than they did just a year ago.

A major point of focus is to give our AutoZoners the tools they need to effectively communicate our products' features and benefits to our customers, ensuring the customer has all the information necessary to make an informed decision.

In many cases, this leads our customers to purchase premium products because they offer the best value to the customer.

Second, we have continued to focus on providing our customers with the broadest offering of parts and accessories to meet their needs, this includes improved in-stock levels in our stores.

While we don't provide statistics on this number I am pleased to say we are saying yes to our customers more often today than ever before.

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

During the fourth quarter, we will begin introducing our new proprietary parts look-up system, ZNet.

This system will put more product and repair information into the hands of our AutoZoners and customers continuing to enhance our offerings and giving our AutoZoners more tools to provide our customers with that truthworthy advice.

Third, I have talked about adding clarity to our offering by reducing the amount of nonautomotive related items in our stores.

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

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

We believe our store presentation today reaffirms our customer's -- to our customers our commitment to be their vehicle solutions provider.

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

During the quarter, we continued to hold what we call WITTDTJR meetings, what it takes to do the job right for our AutoZoners.

The meetings focus on our cultural practices to ensure customer satisfaction focusing on things like drop, stop 30-30, greeting 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.

Improving the knowledge level and effectiveness of our team is an important element of delivering trustworthy advice.

I cannot overstate how important I believe this effort is for our entire organization and I believe our AutoZoner feedback states the same.

Fifth, I mentioned we're continuing to focus on our brands.

We have significantly increased our mix of Duralast branded merchandise, one of the top brands in the automotive aftermarket.

This exclusive brand of high quality parts and products provides us with a key point of differentiation.

Along with our efforts on our import initiative, the successes of this program have only just begun.

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

We are focusing intensely on the basics.

Simply put, excellent customer service and flawless execution.

During the third quarter, gas prices rose considerably as the price of crude oil reached near record levels.

We, like many retailers, are concerned by the sharp price increases at the pump.

These higher expenditures are taking an ever larger share of our customers' wallet.

While AutoZone cannot control gas prices we believe we have initiatives in place to overcome much of these effects.

Additionally, we view higher gas prices as an opportunity for us to help provide trustworthy advice on even simple little things that can improve fuel mileage and save money.

Again, while we're not excited about higher gas prices we certainly have initiatives in place to help offset their impact.

During the third quarter we estimate that weather had a modest favorable impact on our sales due to mild weather across much of the country.

We believe the warmer winter weather caused a drop in certain failure related hard parts categories that was more than offset by increased sales in preventive maintenance categories.

Regarding miles driven we saw slight monthly increases continuing into this quarter versus last year.

Continuing to reverse the trend we saw in the first quarter where miles driven decreased slightly.

We believe this continues to correlate with the belief consumers become used to higher gas prices over time.

Let me reiterate the two statistics we've always felt had the closest correlation to our market growth.

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.

Again, 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 maximize their vehicle's performance.

We believe over the long term that as we execute our initiatives we will 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 Q3 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.

We are determined the invest in one of the most important drivers to both attracting and retaining our customers.

Superior parts coverage.

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

We continue to leverage our hub stores 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 sales.

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

One example of this is the continued expansion of our own brands.

We are absolutely committed to building these brands by offering high quality products at an attractive price to our customers.

We began advertising the Duralast brand at the end of last summer, and we continue to be pleased with the traction this brand is gaining with both our DIY and commercial customers.

We believe we can continue to enhance the growth of the Duralast and Duralast Gold products as their reputation for quality and value is reinforced across the automotive aftermarket.

Finally, for the fourth quarter of fiscal 2006 we will begin launching a new selling tool in our stores.

That tool is called ZNet.

ZNet 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.

For the trailing four quarters, sales per square foot were $247.

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 U.S.

We opened 42 new stores in the quarter for a total of 3,699 domestic stores.

This year we've been able to open stores more evenly throughout our fiscal year.

While our goal has been to open stores at a mid single-digit growth rate for 2006 this year we've opened 116 new stores versus 88 stores this time last year.

Additionally, we were able to reopen two of the locations closed in the Louisiana and Mississippi markets due to hurricane damage while eight remained closed.

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

Lastly, as you know, last fiscal year we started opening stores in Puerto Rico.

At the end of the quarter we had 10 open stores and we've been pleased with their results to date.

Now let's turn to commercial.

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

We now have the commercial program in 2,123 stores supported by 126 hub stores.

I want to spend some time this morning providing insights into the progress in our commercial business.

Our focus in the commercial business is on building that strong operating model for the long term that delivers profitable growth.

We have experienced periods of rapid sales growth in the past, but we didn't deliver substantial incremental profitability.

Our objective is to deliver both.

For the last few quarters we've been testing a wide variety of new concepts in select commercial stores.

We have been very disciplined and methodical with these tests to determine the reasons for their successes.

While our overall sales in commercial this past quarter were basically flat, the stores where our tests were running were not.

These test stores generated substantial same-store sales gains while gross profit dollars increased at comparable levels.

What made our test unique?

Why were they successful?

We believe it boils down to two simple principals.

Making sure we have the appropriate coverage to say yes, and making sure we could get our customers the right parts and products at the right time.

We continue to gain very valuable data on our customers and our customer service levels in this business through the handheld PDA devices we rolled out last year.

With this data we have developed significantly improved reporting mechanisms to focus our AutoZoners on specific key performance indicators and to focus their attention on our priority customers.

In these test markets we gave our AutoZoners significant additional tools.

In fact, initially we overloaded them with resources.

As we have determined the successful elements of these tests and have removed the inefficient resources they have continued to deliver substantial improvements.

These tests continue to focus on leveraging our strengths, tremendous culture of customer service, strong availability of high quality products, and effectively leveraging technology.

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

We believe the extended, deeper availability of parts offered to stores supported by our hub network increases our commercial business.

Therefore we will continue to refine this model to determine where extended parts coverage can make a meaningful difference.

We are continuing to refine and improve our model in these test stores.

We are also expanding these tests into additional stores and markets to determine our effectiveness in various operating environments.

Many may ask, why not quickly roll this model out to the entire chain?

Our answer is that we believe this to be a very promising improvement to our program, but we need to be disciplined in our approach to ensure we deliver sustainable growth, both top line and bottom line, not compromising one for the other.

Additionally, we want to ensure we have a plan in place to deliver the consistency in service and offering our customers want and deserve.

We will develop and implement these enhancements in a fiscally prudent manner.

Now let's turn for a moment to Mexico.

Our Mexico stores continued to perform well.

We opened four stores in the quarter which now gives us 92 stores in Mexico compared with 3,699 in the U.S.

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

This fall we expect to open our 100th store in Mexico.

This milestone opening will certainly be a terrific accomplishment for our team in Mexico, they are a great group of AutoZoners.

Finally, I want you to know that I could not be more proud of what I'm hearing from our AutoZoners and customers.

I am confident we are on the right track to produce long-term shareholder value.

Now I will turn it over to Bill Giles to take us through the remainder of the income statement.

Thank you, Bill.

Gross margin for the quarter was 49.7% of sales, down from 50.3% of sales in the previous year's quarter.

This 62 basis points of reduction in the quarter was not entirely unexpected.

While we obviously were up against our toughest compare of last year in Q3 we also experienced a higher penetration of commodity and maintenance items versus last year which typically have lower margins.

This was somewhat attributable to a warmer spring selling season.

We have continued 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.

Going forward, we believe there continues to be margin expansion opportunity.

For the fourth quarter, we are well positioned to return to margins more in line with the prior year.

We continue to work with our vendors to lower costs and provide the best selection of merchandise for our customers at the right prices.

Our initiative to do more direct importing of merchandise from foreign suppliers has begun in earnest.

Prior to the start of this fiscal year we bought virtually all our goods from U.S. vendors who may or may not have been buying from foreign sources.

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

We have begun to realize some of the benefits from this program, but it will continue to build over time.

Moving on to SG&A, SG&A for the quarter was 31.8% of sales, up 90 basis points from last year.

However this year included a noncomparable charge for the new expensing of stock options under FASB 123R.

On a comparable basis SG&A went up 61 basis points.

The increase was due primarily to the following.

First, occupancy costs increased due to our continued investment in new stores and maintenance on our existing stores.

Second, we continued to invest in store-level initiatives to improve the customer shopping experience.

These initiatives continue to include expanded hours of operation, enhanced training programs, and ensuring clean, well merchandised stores.

We continue to believe they are necessary to ensure we provide an excellent experience for our customers to deepen the relationship with them.

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

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've said before, we expect these investments to gain traction over time and we continue to adhere to that time line.

We are pleased with our progress to date and we are well positioned for the fourth quarter of this fiscal year.

EBIT for the quarter was $253 million, down 2.4% over last year.

Excluding this year's adoption of FASB 123R, EBIT for the quarter was basically flat versus last year.

Interest expense for the quarter was $24.9 million compared with 24.2 million a year ago.

Debt outstanding at the end of the quarter was $1.825 billion, or approximately $90 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 guidance 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 36.7%, below last year's rate of 37.2%.

Over the next several quarters we expect to maintain an approximate 37% effective tax rate.

Net income for the quarter of $144 million was down 2.3% over the prior year.

However, excluding stock option expense in this fiscal quarter it was down 0.5%.

Earnings per share for the quarter of $1.89 was up 1.4% on 76.6 million diluted shares.

But again, excluding this year's share-based option expense earnings per share was $1.92, up 3.3% from last year's $1.86 per share.

Now I will turn it over the Brian Campbell to take us through the cash flows and the balance sheet.

Thank you, Bill, and good morning, everyone.

In the third quarter we generated $237 million of operating cash flow and we repurchased $228 million of AutoZone stock.

It was part of our ongoing stock repurchase program.

We intend to continue to prepurchase stock as long as it is accretive to earnings and consistent with our 2.1 times adjusted debt to EBITDAR liquidity target which we maintained again for the quarter.

For the third quarter of this year we reported yet another industry leading ROIC of 22.2%.

Looking at our inventory levels, inventory per store on the balance sheet plus the excluded Pay-on-Scan inventory was $495,000 versus Q3 last year, of $497,000.

And this was in line with last quarter's $494,000 per store.

Accounts payable as a percent of gross inventory finished the quarter at 82.3% compared to 87.2% last year.

This decline was in part attributable to a change in the way we float inventory receipts during the third quarter.

Specifically, this year we purchased less inventory and had less vendor returns than last year.

This reduced accounts payable as a percentage of inventory.

The goal of this initiative is to improve inventory productivity and drive operational efficiencies for the future.

The fourth quarter will represent a more normalized comparison when we expect this ratio to be generally in line with last year.

We continue to be committed to increased free cash flow through leveraging payables.

This quarter we reported a total of $123 million of inventory on Pay-on-Scan which, in accordance with GAAP is not reflected in our balance sheet.

As we've stated previously Pay-on-Scan is about aligning interest of vendors and AutoZone and is one of the programs we use to achieve our financial goals.

Total working capital was $175 million versus last year's balance of 95 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 7.5% versus last year, capital expenditures for the quarter totaled 66 million and reflect the additional expenditures required to open 46 new stores in this quarter, maintenance on our existing stores, and work on development of new stores for upcoming quarters.

Depreciation totaled $32 million for the quarter.

Additionally during the quarter we entered into a new $300 million four-year credit agreement that replaced a similarly expiring agreement and we amended and restated our $700 million agreement in essence creating a $1 billion, four-year facility.

Additionally, the $150 million of senior notes with the 7.9% annual interest rate were retired.

As of May 6, 2006 AutoZone continues to be one of the few players in our industry to have investment grade debt ratings.

Our senior unsecured debt rating for Standard & Poor's is BBB plus and we have a commercial paper rating of A-2.

Moody's Investor Service has assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P2.

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

Now I will turn it back to Bill Rhodes.

Thank you, Brian.

During the third quarter we had much success in executing the initiatives we outlined at the beginning of the year and more importantly we believe we're make good progress for the future.

We were thrilled to have completed in our second quarter the enormous and important task of resetting over 3,000 stores in just 12 weeks.

I'm excited to say the feedback we've received during the third quarter from both our AutoZoners and customers confirm it was the right decision for our future.

Our retail results continued to show improvement while our commercial tests generated excitement across our organization.

While we do not provide financial guidance we are enthusiastic about our future.

We continue to feel confident in our plans.

Our story continues to be one of steady profitable sales improvement.

We knew we had to complete the task laid out before us during the first half of the fiscal year in order to be well positioned for the important third and fourth quarters.

We continued to execute our game plan.

This year continues to be about positioning us for the long run.

While some of our initiatives have been completed, most will be ongoing.

While we are always testing new initiatives, always pushing to see what new and creative strategies can be implemented we are not talking with you today about any new strategies set to be launched during the fourth quarter.

This fourth quarter of fiscal 2006 will be about flawless execution of the game plan we established at the end of last year.

Customer service will continue to be our key point of differentiation and AutoZoners across the Company are committed to providing that service to every customer.

Our mission must be to continue to make AutoZone the best place to shop as well as a great place to work for our AutoZoners.

We are energized by our AutoZoners renewed commitment to our culture exhibited throughout this year.

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 bullish about our future.

We believe our business is atypical.

We are well positioned to grow profitably for the future.

We have a terrific management team that is very committed to this business.

We continue to demonstrate industry leading financial metrics, being a disciplined company, we have proven our ability 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 level of ethics.

I thank you today for letting us share with you our company's past accomplishments and touch on our ongoing initiatives.

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

Now we'd like to open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Matthew Fassler, you may ask your question.

Please state your company name.

Thanks a lot.

Goldman Sachs.

And good morning.

Good morning, Matt.

A couple of questions.

First of all, obviously, you did manage to scale back the expense growth a little bit as you had intimated that you would, from Q2 to Q3.

As you move into the fourth quarter you start to cycle the period a year ago when you began to spend a little more aggressively on the business.

At the same time I realize in the seasonally stronger quarter you leveraged some of your fixed costs a bit more aggressively.

How should we think about your spending goals and what it will take on the SG&A growth front to continue the initiatives that you launched this year and that have gotten you some progress here?

Okay.

Thanks, Matt.

First, I'd like to start by saying we're very pleased with the progress we're making on those initiatives.

They're making a meaningful difference in our store presentation.

They're making a meaningful difference in our AutoZoners confidence level and morale.

We've also seen, as I mentioned, significant improvements in customer service metrics which we've been very pleased with.

We did begin spending some incremental spending during the fourth quarter last year, Matt, but the majority of it really was rolled out during the first quarter of last year.

So while we'll see a little bit of improved comparability in the fourth quarter the real benefit comes in Q1 and Q2, the full benefit.

Understood.

Second question.

Given all the accounts from many retailers of moderating sales in late April and early May across a number of durable good subsectors I think we'd be remiss if we didn't ask you whether, in fact, you have seen some of the same slowing and underlying trend that others are seeing.

I realize your compare was easier and you delivered your best comp in a couple of years on the heels of that, that's obviously a great accomplishment, but at the margin it feels like something has changed in the marketplace.

I'm curious what your view is on that.

We don't get into specific week to week trends because quite frankly they're macro factors that come in and out over time.

We watch our business over the long term.

We remain confident with the program that we're continuing to deliver and look forward to the future.

Finally, last question, did -- I know that you account for the impact of LIFO a little differently than some of your competitors.

Did that move the needle in any way as you look at your gross margin this quarter?

Well, I think the important thing about us on LIFO, is we have a significant unrecorded LIFO benefit, and, therefore, there's no impact in our quarter on LIFO.

And that unreported benefit, if you will, was at a stable level or did it move in a meaningful way this quarter?

It did move up again, Matt.

We'll report in our -- the third quarter 10-Q $191 million as a balance versus the second quarter, 183 million.

Got you.

Thank you very much.

Thank you.

Gary Balter, you may ask your question.

Please state your company name.

Thank you.

From Credit Suisse.

Two questions.

First of all I want to welcome Bill Giles to the Company.

Thank you, Gary.

Bill, I'll start with you, just a quick easy question, then go to something a little more detailed.

You've mentioned that the rating agencies I think reconfirmed, or maybe Brian mentioned reconfirmed your ratings.

In the press releases you've always used six times rent, and usually when we talk to rating agencies they use eight times.

Are they comfortable with your using six?

And can you explain why you do that?

Well, w're comfortably using six.

We think it the's a better representation of what the outstanding debt is.

And I think if you look the agencies use different rates, one use six, one use eight.

The long and short of it is that we think six is more appropriate given the complexion of our rent.

So the two one, because there would be two, three at eight so we're--?

Correct.

We're consistent year-over-year in the how we do it on a long-term basis so it's apples to apples as you go out.

On more back to the business, could you talk about -- the commercial sales were kind of on the flattish side.

Could you talk about some of the experiments that are going on now and when you see some of that rolling out to help drive commercial?

Gary, this is Bill.

As I mentioned on the call, we launched these initiatives back in the wintertime in a small number of stores, and we overloaded them with resources.

Anything that we could think of putting in there we put it there to see how high was high.

Once we began getting some traction we went back and looked at the resources that were working and those that weren't, and we reduced those, and we've continued to see significantly improved performance, albeit in a small group of stores.

Therefore we want to do before we get into which initiatives are working and which aren't we want to go into more stores and different operating environments to make sure that we really know which ones are driving our improved performance.

So we're not going to see that roll out for awhile?

I think we're learning things about it every day.

As we see improved results we're going to roll it further.

As we need to refine things more we're going to slow it down.

Okay.

Thank you.

Thank you, Gary.

Thank you.

Tony Cristello, you may ask your question and please state your company name.

BB&T Capital Markets.

One question I wanted to just talk a little bit about is advertising and marketing.

You talk about building a brand awareness and the Duralast brand.

Can you comment a little bit about levels of marketing or ad spend that you're seeing now versus maybe last quarter or even last year in an effort to build out that brand?

Yes, Tony.

I think quarter versus quarter our advertising spend changes because there's more efficient ways for us to do it when we had higher sales volume.

So traditionally we advertise more in the third and fourth quarters than we do for instance in the second quarter, but on a year-over-year basis there's not any significant difference in our advertising spending.

However, we're doing things in different ways.

We've talked about the Kenny Wallace sponsorship.

That's one way that we're advertising.

One of the things that we've done is we've shifted some from radio into TV and specifically some of that TV spending is based upon the Duralast brand where we're out marketing that brand to our customers, both DIY and commercial.

We're very pleased with that program so far, we've run several spots, one spot was on -- the first spot was on batteries.

Since then we've run spots on general parts as well as alternators and brakes.

We're excited about what we're doing with that brand so far and we're really excited about how it's being received in the market.

Okay.

And I guess one question relating to the commercial side of the business.

You talked about more resources.

Does that include more parts or more inventory availability at those locations versus what might be at other locations not involved in this sort of test?

We're always -- as I mentioned we threw tremendous amounts of resources and one of those resources we looked at was inventory.

Our inventory coverage, it's not that radically different.

I think people expect that commercial has one inventory set and retail has another.

It's amazing the overlap.

As we put incremental inventory in there, typically we see that we sell more of it in retail than we do in commercial so we're constantly refining our inventory positions on a store by store basis.

That has been going on for many years and will continue.

And are the counter men, the parts desk, are they incented on sales?

Are they incented on profitability?

Can you just talk a little bit about measures you use in terms of retention to keep those people as they're kind of key to the whole process in terms of driving the commercial business?

We call them commercial specialists.

They're the ones that answer the phones for our commercial customers.

Today they're paid on an hourly wage.

We give them incentives on certain things, just like everybody else, but they're not incentive based.

Obviously we're testing some different things, and I don't want to get into specifics on it at this time, but we're looking at different ways to make sure we incent them.

I did speak specifically on the call about how our PDA devices have given us the opportunity to reengineer our reporting and make sure that we have those people focused on the specific key performance indicators that drive our business, and that's been rolled out over the last few months and we're very excited about the emphasis that it's placing our commercial specialists on and their priority customers.

Okay.

Great.

Thank you.

Thank you, Tony.

Cid Wilson, you may ask your question and please state your company name.

Cid Wilson, Kevin Dann & Partners.

First, congratulations on a nice same-store sales number.

My first question is, is that can you touch a little bit more on your goals in terms of your nonautomotive reduction of inventory and what your goals are there?

Just a little further there?

I think for the most part our nonautomotive product reduction has been completed.

That's behind us.

The presentation that you see in our stores today is the presentation that we're currently comfortable with.

As you know we had a lot of things on our end caps and on displays that weren't necessarily communicating our core offering to our core DIY customers.

If you go into our stores today you'll go into the stores and you'll see things in the windows that are relevant to everybody that comes to our stores.

You'll see things on the end caps like McGuire's wash and wax products, like tools.

Things -- you go into today and one of the first presentations you'll see, behind the red zone, you'll see R-134A.

That's speaking to that heavy DIY wire and reconfirming to them that we are their vehicle solutions provider.

Also, you mentioned that you'll be introducing ZNet in the fourth quarter.

Any -- could you give us an idea of like for example, the cost of rolling it out and any expectations in terms of the rollout?

Related to, Cid, the capital investment, it is a part of our overall capital expenditure guidance of being approximately the same as last year.

It involves equipment and wiring for stores for broadband technology, but it's just a continual ramp and roll out for our stores.

Cid, I think it's important to note that quite a bit of that hardware has already been rolled to the stores.

You go to our stores today, you will see in many of our stores a vastly different presentation of the technology that's there.

Much of the infrastructure, not all of it, but much of it has already been put in place in preparation for ZNet.

We're excited about ZNet.

We think it's going to give our AutoZoners more tools to be able to convey more trustworthy advice to our customers.

That goes from being able to provide specific vehicle repair information on the vehicle the customer's working on to being able to provide graphics of the parts that they're looking for.

Okay.

And on my final question is regarding comps looking into fourth quarter, I know you don't give guidance but looking at historically, last -- the last two years you've had down comps in the fourth quarter whereas you have a pretty easy comparison of down five in the third quarter but it was up in 2004.

Is it reasonable to assume or at least is it reasonable to interpret that the fourth quarter is an easier comparison compared to the third quarter, when looking at what you're up against?

Cid, in general, we always look to improve upon our results every quarter, but there's still no guarantees.

We have to continue to execute and improve on our initiatives, but we certainly hope but, again, we don't provide that kind of information.

I think it's important too, Cid, we're not focused on any one number over any one short period of time.

If you think about the things that we've done over the last year they've been very focused on improving our operating model for the long term and making sure that we improve our relevancy to our customers.

Okay.

Thank you very much.

Thank you, Cid.

Gregory Melich you may ask your question and please state your company name.

Greg Melich with Morgan Stanley, and Bill, welcome again, as well.

Thank you, Greg.

My question is really on inventory and where we see that shifting.

It sounded like there were some one off things this quarter that let the payables drop relative to inventories.

Specifically I was wondering why Pay-on-Scan was down?

Were there any vendors that switched back, or was there a growth in direct sourcing that may have changed that?

Okay.

Let me start with Pay-on-Scan, Greg.

Pay-on-Scan is one tool that we use with our vendors to achieve our goal of 100% accounts payable to inventory coverage.

It is not "the" tool, it is not mandated.

It is "a" tool to get us there.

We have other tools that are out there, like our supplier confirmed receivable program.

We work with our vendors to see which one of those programs or other programs are the most appropriate for them and if one of them wants to move from Pay-on-Scan to supplier confirmed receivable and it improves our net position then that's what we're going to do.

There's not a bias one way or the other.

It's a focus on how do we improve and how do we achieve our 100% to inventory goal.

I think if you look at the inventory overall, if you take a look at it on inventory on a per-store basis you'll see a lot of consistency this year relative to last year and I think some of the fluctuation that we experienced in the third quarter this year is really more comparative to the prior year rather than activity this year.

We've done a better job of flowing inventory in a more ratable basis throughout this year, and as you look at inventory on a per store basis it's fairly consistent throughout the year.

So just to make it clear the Pay-on-Scan drop may have been a vendor choosing to go the other way, which was still better for you net-net.

Yes, it may have been.

It may have been better for them net-net as well.

What we want to do is make sure that we optimize the total supply chain.

Not focus just on us, but focus on them as well, and what's the best way to optimize our two positions.

If I could just a second one on the SG&A, the extended hours, could you just give us an update as to when you actually did that and how many stores it impacted?

Yes, we did it, Greg, excuse me, I don't know exactly when.

My recollection is around June of last year.

So we're about to anniversary that point in time.

We did it in the stores that we felt like it would work in.

It's a significant amount of our stores.

More than half but not all.

Great.

Thanks.

Thank you.

David Cumberland you may ask your question and please state your company name.

Good morning.

With Robert Baird.

On the loyalty program how has that performed versus expectations?

Do you plan to extend that beyond May?

And if so, are there any changes planned for the next phase?

Well, we're constantly looking at the loyalty program.

We've been pleased with its performance to date but we're looking at ways to continue to optimize it.

One of the reasons we introduced the loyalty program was we wanted to reintroduce some of the customers that we had lost back to AutoZone and we've been pleased with what that's done.

Over the long term we're going to continue to look for ways to drive customer loyalty, but it's not just about a discount card.

It's also about gaining more information on our customers and their purchasing habits.

There's also other things that we can do that are nonmonetary rewards that we're going to be testing.

On the commercial business, Bill, for awhile you've talked about focus on profitability.

Has the profitability in commercial changed much over the past year or so?

We haven't seen significant changes in profitability over the last year or so on a like versus like basis.

Okay.

Thank you.

Alan Rifkin, you may ask your question and please state your company name.

Alan Rifkin with Lehman Brothers.

Bill, with respect to your initiative to extend the hours of operation once we get into the fiscal fourth quarter and you've anniversaried that initiative should we assume that that will at that point in time be accretive to the SG&A line?

In other words are you seeing a 15% IRR on that initiative alone?

Alan, we will anniversary that in June as I mentioned but that's only one of the initiatives and it's a small part of the overall initiatives that we've launched so it's not the key driver of anything.

As you saw, the biggest increase in SG&A that we had we experienced in the first and second quarters.

Okay.

Bill, you also mentioned with the reset of the 3,000 stores that you're happy with the results.

Would you contemplate, if it could justify a 15% return, committing additional capital to the stores, or do you feel that at this point in time no additional capital commitment of significant nature is necessary?

I think they're two separate questions, Alan.

The first question is, if we had a compelling test that showed that adding capital to our stores would drive a significant 15% after-tax IRR improvement, we would absolutely do it.

But your second part of your question, we're very comfortable with the presentation we're making in our stores today.

We're really quite pleased with the progress we've made.

We think it's a very compelling presentation for our customers.

Great.

One last question, if I may.

Based on our channel checks and talking to other sources, we've heard that you're actually reducing the commercial presence in some specific markets, like Jacksonville, up in Michigan, parts of New England.

Would you be able to comment on those specific markets relative to the commercial initiative?

Alan, you know I'm not going to get into specific individual small markets, but I'd say just look at our overall commercial programs.

They're up for the quarter.

We're continuing to look at ways to optimize each individual store and each individual market.

Okay.

Thank you, Bill.

Thank you.

Danielle Fox, you may ask your question and please state your company name.

Danielle Fox, Merrill Lynch.

First, just given the mix shift in favor of commodity and maintenance items, is it fair to say that it was primarily traffic rather than ticket that drove the comp?

No, Danielle, I think it was more ticket than it was traffic.

Okay.

And I guess the second question is just per store labor hours.

Are they up year-over-year, especially given the extended hours?

Specifically, we haven't talked about what's going on specifically with store labor hours but we have talked about a significant amount of initiatives from both our training initiatives to expanded hours of operation.

So I think you can draw your conclusions from that.

Okay.

Thanks for taking my question.

Thank you, Danielle.

Maurice Dann, you may ask your question and please state your company name.

Thanks.

Maurice Dann with Janus Capital, again, welcome, Bill, to the team.

Thank you, Maurice.

I just wanted to follow-up on Danielle's last question about the comps.

Again, could you just comment on what kind of geographical disparity you may have seen between the regions given some of the different weather patterns that we saw earlier in the year?

Again, just any comments on the trends in the quarter would be appreciated.

Maurice this is Brian.

In general, there's going to be ebbs and flows with the weather and with different regional trends but over time it definitely evens itself out so we don't go into great detail on deviation.

Any comment on the trend through the quarter?

No, not so much.

In fact, consistency.

The business, it just ebbs and flows.

The weather was seasonally warm throughout the quarter, so it was uneventful in that regard.

Thank you.

Thank you.

That ends the question and answer portion for today's conference.

Before we conclude the call I'd like to take a moment to reiterate that we know we still have much to accomplish.

While all of us at AutoZone are proud of our efforts thus far we are not satisfied with our results.

We understand the huge opportunities that continue to exist within such fragmented businesses as U.S. retail, commercial, and Mexico.

Having such small market share across each of these priorities, we have only just begun our efforts to grow our business profitably.

The AutoZone story cannot be measured by any short burst.

It has to be about setting a realistic pace for growth.

It is about running a marathon and right now I like the pace we've set for the fourth quarter and beyond.

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

Thank you.

That concludes today's conference.

You may disconnect at this time.