汽車地帶 (AZO) 2007 Q3 法說會逐字稿

Welcome, and thank you for standing by.

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

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

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

Central time, 11:00 a.m.

Eastern 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 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, energy 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 from those contemplated by such forward-looking statements, and such events could materially inversely 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 statement, whether as 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 AutoZone's Form 10-K for the fiscal year ended August 26th, 2006 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.

I'd also like to remind parties you are in a listen-only mode until the question-and-answer session of today's conference.

This call is also being recorded.

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

Now I'd like to turn the call over to Mr.

Rhodes.

Thank you, sir, you may begin.

Thank you.

Good morning, and thank you for joining us today for AutoZone 's fiscal 2007 third quarter conference call.

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

Regarding the third quarter, I hope you have 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 is available on our website, www.autozoneinc.com.

Please click on "Quarterly Earnings Conference Calls" to see them.

To begin I'd like to thank our entire organization for living the AutoZone pledge in 2007.

We again set a record for sales, earnings, and earnings per share on the quarter.

While we always have opportunities for improvement, I am genuinely excited about what we are doing culturally.

In our management team's opinion, we feel our efforts to improve our store standards and appearance have yielded a vastly improved presentation, and we are well on our way to ensuring every store looks great.

Our AutoZoners tell us the same thing.

In fact, our customers tell us this, as well.

Our AutoZoners are performing well and we're providing them more tools than ever before to succeed in helping our customers solve their automotive needs.

We are committed to our focus on improving our culture through continued focus on training, leveraging technology to improve our AutoZoners' knowledge and improve parts availability.

While our sales results didn't meet our aspirations during the quarter, as we look deeper into those details we are encouraged.

Over the last several weeks, many retailers have announced that their sales trends softened significantly during the first half of April, and we experienced the same softening.

However, we continue to be encouraged by our efforts.

Although we have not fully completed our initiatives outlined at the beginning of the year, we believe we have made significant improvements in our parts assortment, enhanced customer service through technology improvements, and have a workforce that is better trained and ready for our busiest selling season, our fourth quarter.

However, we are not without external challenges.

Obviously, the potential negative impact of gas prices over $3 a gallon concerns us, as this could put more pressure on our customers, and we never know what impacts weather can have on our short-term results.

I am not going to talk to you today about new ideas or strategies.

I am going to reiterate the same strategies we put in place since the end of last year.

The operating initiatives we are working on take time to affect customer buying behavior.

While the feedback we're receiving from customers is definitely encouraging, we realize our average customer shops with us between three and four times a year.

Therefore, it takes time for customers to see and experience the changes we're incorporating today.

I'd also like to take a quick moment before getting into our financial details to thank our AutoZoners for the incredible amount of effort, dedication, and committment they've displayed for the last couple of years.

We asked 50,000 plus individuals to believe in and execute our plans last year.

We determined it was time to reset the sales floor in virtually our entire domestic store base last year.

Well over 3,000 stores were reset in a matter of three months.

Then, our AutoZoners were asked this past fall to reset our hard parts assortment, all while implementing a major new technological enhancement, our Z-net electronic parts catalog.

Nothing about our AutoZoners' job responsibility stayed the same, except of course, continuing to provide exceptional service to our customers, and they did what they were asked, only they did it sooner.

People often talk about how big organizations have difficult times moving, moving quickly, for example, to adjust to a particular situation.

The more I hear this idea mentioned, the more I can say without hesitation, that is not AutoZone.

From an idea's inception to its thorough testing, to its implementation across all our stores, I am consistently impressed with how our team gets the job done and done above our stated expectations.

It's an honor and a privilege for me to be a part of this great organization, and I'm constantly amazed with the passion our AutoZoners have for our customers and our great Company.

As in past quarters, I'll start with comments on our overall financial results, and then go into detail regarding our DIY sales initiatives, commercial selling initiatives and Mexico.

Then, Bill Giles will provide more detail on our earnings performance, as well as overview both our balance sheet and cash flow statements for this past quarter.

Finally, I'll provide a few closing comments.

Regarding the third quarter, for the 12 weeks ended May 5th, we reported sales of $1.474 billion, an increase of 4% from last year's third quarter.

Same-store sales or sales for stores opened more than one year, were up 0.4% for the quarter.

Overall, the quarter started out stronger, but as we mentioned, early April was a disappointment.

And I'd be remiss if I didn't mention that at the start of the quarter the price of a gallon of gas was on average nationally $2.30, but finished at $3.05 a gallon.

While this run-up is disconcerting to us, we are not unaccustomed to experiencing such increases.

Last year, our third quarter began with the price of a gallon of unleaded gas at $2.24 and finished at $2.91.

I point this out to say we believe our customers, while certainly impacted, do get accustomed to price increases.

We believe we can continue to do things with both our merchandise and marketing efforts to provide value for our customers during times of high gas prices.

In the third quarter, gross profit as a percentage of sales was up 23 basis points versus last year's quarter, while operating expenses as a percentage of sales increased by 11 basis points.

This resulted in an operating margin of 18%, up 12 basis points from last year's quarter.

Operating profit increased 4.7% versus the prior year.

Net income for the quarter was $152 million, and diluted earnings per share increased 15% to $2.17 from $1.89 in the year ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 22.7%.

This marks the third consecutive quarter this ratio has improved on a sequential basis.

We have, and will continue to make investments that generate returns that significantly exceed our cost of capital.

We 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'd like to talk about our DIY sales results.

Total domestic retail sales were up 3.8% for the quarter.

During the third quarter, we continued to focus on driving sales and profits for the long-term.

I'd like to speak individually to the major initiatives we've established for our organization to drive both commercial and retail sales for the fiscal 2007.

For us, our focus continues to be about our customers and their interaction with our AutoZoners.

We demand that our AutoZoners always put our customers first.

For that reason, we continue to challenge our AutoZoners to make sure they're living the pledge.

This past quarter, we continued our focus on our Z-net software.

As a reminder, Z-net is our new proprietary electronic parts catalog.

We're biased, of course, but we believe it's the most content-rich support tool for helping sell auto parts in the industry.

It has a tremendous amount of pictures, how-to diagrams, and vehicle specific repair information that we didn't have in our old green screen look-up system.

Our AutoZoners took to the task of learning the system to heart and the results began to show as the quarter progressed.

Initially, many of our AutoZoners were apprehensive about learning this new technology.

As expected, they were comfortable with the previous system, and we had some growing pains as certain AutoZoners became familiar with the new technology.

But the system is very intuitive.

In fact, at some point, customers may be able to look up items themselves using this technology.

During the quarter, we held a [witiger] meeting for all of our store AutoZoners focused on teaching them all the functionality of Z-net so they could leverage it with their customer interactions.

For the remainder of 2007, we will continue to focus on training for our AutoZoners, from systems training to witiger training to inventory management training.

Although our customer satisfaction scores versus last year continue to improve, we are never satisfied with our current performance and believe we can make further improvements.

We want our customers to understand they can rely on our AutoZoners for the trustworthy advice they need to get the job done.

We know how important service is in differentiating us from our competition.

We continue to test different labor, marketing, and technology models in our stores to make sure we're performing at our highest level.

I mention these learnings only to point out that we aren't satisfied.

In fact, we are never satisfied.

We can always improve our offering to our customers.

Lots of of people sell auto parts.

But we believe our customer service is one of the primary differences between us and our competitors.

It's why we have things like our cheer and our pledge and our intense focus on continuing to build our culture.

We learned a long time ago, the service our AutoZoners provide to our customers is the primary reason they come back to us.

We also continued to challenge all of our AutoZoners to become ASC certified.

It certainly is not an easy exam, but I can't stress how important we believe it is for our organization to be knowledgeable about selling, and selling automotive products requires extensive knowledge.

I congratulate our current certified AutoZoners.

I'll shift gears and mention that we continue to measure and monitor our customer satisfaction scores very closely.

Our surveys continue to be encouraging, and we continue to show improvement versus last year.

Quickly, I'd also like to point out our new advertising campaign implemented during this quarter.

While we currently have television and radio advertisements on air that introduce our new Z-net offering, we are also continuing with our Trustworthy Advice campaign.

We are quite pleased with both of these campaigns, and won't be letting up on our efforts heading into our busiest selling season.

Expect to hear the AutoZone name frequently in the coming months.

A second major focus for this year continues to be around our hard parts assortment.

On last quarters earning call, I said we would be substantially complete with our product additions in the third quarter.

I'm proud to say we met our goal.

We substantially completed the rollout of the line reviews we expected and added more hard parts coverage into our stores than we have in years.

And we accomplished this all while managing to a targeted inventory level per store.

While inventory per store is up over last year at $504,000, our inventory per store, net of payables, is lower than last year at $73,000 per store.

We believe this additional coverage means a great deal to our customers.

We realize for both our retail and commercial customers that not having the part or product our customers need is a critical failure.

All the best service in the world means nothing if we can't say yes to our customers' needs.

We are very excited about what we've done in this area, and believe we can continue to refine these efforts well into the future, building on our reputation for having the right merchandise at the right price.

While we will have a few additional rollouts in the fourth quarter, we were substantially complete in the third quarter.

I'd also like to take a moment and thank our vendor partners for their considerable efforts in completing this very important initiative.

Additionally, we will continue to grow our brand recognition in the marketplace through our proprietary brand initiatives.

We believe these products, many of which bear the Duralast name, continue to offer another key point of difference for us and provide a great value to our customers.

Finally, our direct import initiative continues to gain traction.

We still have a very small amount of our products that are imported directly, but we have been very pleased with our progress to date.

This will continue to be an important initiative for us for many years to come.

During the third quarter, as I said earlier, gas prices increased.

While we believe the pent-up demand for certain hard parts will drive consumption into the summer months, there is no guarantee, especially if prices keep moving upward.

However, I'd like to point out the Energy Information Administration is stating they expect gas prices to remain in the $3 per gallon range for the next couple of months.

With that said, we cannot control the prices of gas at the pump.

We certainly feel with more cars on the road than ever before, our ability to grow sales remains strong over the long run, and consumers ultimately adjust their spending habits for higher prices.

We will continue to develop marketing programs that support our customers' needs during these high price times.

Regarding miles driven, we saw decreases in miles driven in January and February, and a slight increase in March.

April is not yet available.

Let me reiterate, the two statistics we've always felt have the closest correlation to market growth, miles driven and the number of seven-year-old and older vehicles on the road.

While miles driven have been challenged recently, there are more registered vehicles on the road today than in our country's history.

We estimate that weather had a negative impact on our sales during the third quarter, specifically in April when temperatures dropped noticeably across the majority of the country.

This April was the coldest April in the last ten years according to the Planalytics Corporation, and we believe this did slow our progress.

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

Overall, consumer price inflation in Q2 remained in the low single-digit range.

Finally, I'd like to take a moment and update you on our inventory levels per store.

At $504,000 per store versus $495,000 last year's third quarter, the increase was primarily from additions to our hard part categories, and was in line with our expectations.

For the trailing four quarters, sales per square foot were $241.

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

Now turning to Commercial.

For the quarter, total Commercial sales were down 0.4% from last year's quarter.

We now have the Commercial program in 2,157 stores supported by 133 hub stores.

Our Commercial results were similarly affected by the April slowdown.

However, we continue to be encouraged by our opportunities in this business.

There are significant transformational improvements happening in our Commercial business, and none more important than the profitability we are enjoying.

While we do not break out this business profitability, I'd like to state that it is up materially over last year.

Additionally, we feel with the learnings from our test stores which continue to perform well, we have a lot to be encouraged about.

The hard parts additions that were made these past couple of quarters are very important to our Commercial customers.

We have supplemented these additions with an enhanced marketing campaign that communicates our expanded offering to our professional customers.

We have also made some strategic additions necessary to continue to grow this business.

We've added key personnel in order to develop a world-class sales culture necessary to succeed in this industry.

AutoZone grew up as a retailer, but the sales approach in a direct sales business like Commercial is quite different than a retail sales approach.

We are very focused on building a strong sales team that has the sales collateral, processes, and training necessary to present compelling reasons to our customers to earn their business.

Then, we must deliver on those promises.

We believe we're making good progress in this area, but substantial opportunities still exist for us to improve.

That is why we continue to be prudent with the expansion of our programs and our test program.

We are very focused on building on our heritage of leveraging technology to deliver exceptional service in this business.

We have made considerable refinements to our proprietary order management system and have several other refinements that will be implemented over the remainder of the calendar year.

As discussed earlier this year, we have brought our accounts receivable processing in-house.

This is a critical point of contact with our customers and now that we are interacting with our customers on a daily basis, we are finding more ways to leverage technology to streamline this important process.

I would also like to discuss the upcoming change in our relationship with Midas International.

At the end of June, we will no longer be the supplier of stocking orders to Midas International or their dealers.

Midas International asked us for additional concessions that would make this business unattractive to us.

We weren't willing to implement these changes, and they decided to exercise their option to terminate this agreement.

We recognized a $1 million termination fee during the third quarter.

This was the only supply chain program we had, and our professional customers continue to move away from stocking programs to a hot shot arrangement.

Although our exclusive stocking arrangement will end, we have developed very strong relationships with the Midas dealers, and we'll be very aggressively pursuing their business.

Our approach is to leverage our strengths to provide a strong value proposition to our customers.

We believe leveraging our national footprint and our extensive parts coverage in our stores is a much more effective way for us to service these very important customers.

This will create a headwind for us over the next few quarters, but the supply chain business has been deteriorating for the last couple of years.

Again, our approach is to deliver a solid value proposition to our customers, and realize a solid return on our investment.

We won't deviate from this approach.

I would like to thank all of the Midas dealers for their business, and make sure they know we will continue to aggressively work to earn their business for many years to come.

Finally, we remain committed to building this business to win for the long run.

We will not do things just to generate sales in the short run.

We are not interested in driving short-term sales results at the expense of profits.

We believe all of the items we've been discussing are building momentum.

Each of these pieces must work in a cohesive manner for us to not only attract, but maintain our commercial customers.

Now let's turn to Mexico.

Our Mexico stores continue to perform well.

We opened two new stores during the third quarter.

We currently have 110 stores in Mexico, compared with 3,881 in the U.S.

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

Finally, I want you to know that I remain confident we are on the right track to produce long-term shareholder value.

I believe the initiatives we have in place will lead to continued future success.

Now I'll turn it over to Bill Giles to take us through the remainder of the income statement, cash flows and the balance sheet.

Thank you, Bill.

Gross margin for the quarter was 49.9% of sales, up 23 basis points compared to last year's third quarter.

In the third quarter, margins continued to benefit from our ongoing category management initiatives, import efforts, and a drive to leverage supply chain efficiencies.

We continue to be challenged on the cost side of the business, specifically related to oil-based products, but have made strides to reduce expenses in other categories.

We also continued to be successful in working with our vendors to offer the right products at the right prices to our customers.

This includes supply chain initiatives, tailoring merchandise mix, and the continued implementation of our good, better, best product lines, all allowing us to price our products appropriately, while giving our customers great value.

Going forward, we believe there continues to be opportunity for gross margin expansion, albeit at reduced rates.

Our direct import initiative is in its early stages, but we will continue to discuss it in future quarters, and we are extremely proud of our merchandising organization for their abilities to improve margins while pressures on procurement costs continue to exist.

SG&A for the quarter was 31.9% of sales, up 11 basis points from last year.

The increase was primarily due to higher depreciation expense versus the previous year.

Specifically, depreciation was 23 basis points higher than last year's third quarter, which was offset in part by lower costs related to continued cost management initiatives.

Additionally, we continue to invest in additional marketing efforts and training programs for all our AutoZoners in order to improve customer service.

As I have mentioned before, the AutoZone culture of thrift and focus on cost management is very impressive.

During the third quarter, we implemented a new initiative that is in its very early stages, but provides us with another opportunity to improve our cost management.

We began hosting reverse auctions on some of our non-product purchases, and we have been very pleased with our initial results and will continue to look for ways to take costs out of this business while improving customer service.

EBIT for the quarter was $265 million, up 4.7% over last year.

Interest expense for the quarter was $27.1 million compared with $24.9 million a year ago.

Debt outstanding at the end of the quarter was $1.939 billion, or approximately $114 million more than last year.

The increase in interest expense reflects higher levels of debt, 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.

Additionally, interest was higher due to the accounting for capitalized leases established in the first quarter of this year.

We expect interest expense to remain higher than the previous year for the remainder of fiscal 2007.

Our adjusted debt levels were maintained in line with our guideline of 2.1 times our trailing 12 month EBITAR.

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 36.3%, below last year 's rate of 36.7%.

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

Net income for the quarter of $152 million was up 5% over the prior year.

Earnings per share for the quarter of $2.17 were up 15% on 69.9 million diluted shares.

Relating to the cash flow statement, in the third quarter we generated $203.7 million of operating cash flow, and we repurchased $245 million of AutoZone stock as part of our ongoing stock repurchase program.

We intend to continue to repurchase stock after we have appropriately allocated capital to our existing stores and new store openings, as long as it is accretive to earnings and consistent with our 2.1 times adjusted debt to EBITAR liquidity target, which we maintained again for the quarter.

For the third quarter of this year, we reported an industry leading ROIC of 22.7%.

We're proud to report that this metric continues to improve over last year's already industry leading rate.

Looking at our inventory levels, inventory per store on the balance sheet plus the excluded pay-on-scan inventory was $504,000 versus Q3 of last year of $495,000.

As Bill discussed earlier, this inventory amount reflects new SKUs added in connection with our new product assortment initiatives.

Accounts payable as a percent of gross inventory finished the quarter at 85% compared to 82% last year.

We continue to be committed to our goal of achieving 100% AP to inventory, and we are pleased with our momentum.

This quarter, we reported a total of $31 million of inventory on POS which, in accordance with GAAP, is not reflected on our balance sheet.

As we have stated previously, POS is about aligning the interest of AutoZone and our suppliers, and is one of the programs we use to achieve our financial goals.

Total working capital was $71 million versus last year's balance of $175 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 5.6% versus last year.

Capital expenditures for the quarter totaled $55 million, and reflects the additional expenditures required to open 41 new stores this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters.

Specifically related to new store openings, our new stores are on track to achieve at least a 15% IRR, and we continue to see ample opportunity to open stores in the U.S.

at a mid single-digit growth rate for the foreseeable future.

We opened 33 new stores in the quarter for a total of 3,881 stores in 48 states, the District of Columbia and Puerto Rico.

Our goal this year was to open stores more evenly throughout our fiscal year.

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

Lastly, as you know in July 2005, we opened our first store in Puerto Rico.

At the end of the quarter, we operated 14 stores and we have been pleased with their results to-date.

Depreciation totaled $37 million for the quarter, higher than last year due primarily to new stores and the accounting for new capital leases established in the quarter.

As of May 5th, 2007, AutoZone continues to be one of the few players in our industry to have investment grade debt ratings.

Our senior unsecured debt rating from Standard & Poor's is Triple B Plus, and we have a commercial paper rating of A2.

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'll turn it back to Bill.

Thanks, Bill.

In summarizing AutoZone's third quarter results, I would first highlight our EBIT growth of 5% over the prior year's third quarter and our 15% EPS growth.

In an environment where we are seeing a more cautious consumer, the AutoZone model proved itself capable of generating double-digit EPS growth again.

While we are definitely not satisfied with this quarter's sales results, we are confident our model remains very strong.

We believe we have the correct strategy to succeed for the long run.

We continue to feel confident in our plan.

We understand our success is built on doing the little things right to satisfy our customers.

We believe our stores look great, and our AutoZoners have better tools at their disposal that are better than ever before.

However, I want to reiterate, our approach is about steady improvements over the long run.

Our story continues to be one of steady, profitable sales improvement, sustainable, subtle improvements, refining inventory assortment, making our AutoZoners more knowledgeable and efficient.

As we head into our busiest season, the fourth quarter, we continue to focus on training our AutoZoners, expanding our Commercial focus, prudent, paced growth in Mexico.

We are about staying focused while making methodical improvements in the model so we will be well positioned for future fiscal quarters and years.

On the quarter, both our retail and commercial sales trends were encouraging before April.

However, our survey results tell us the AutoZone shopping experience continues to improve versus last year.

While we do not provide financial guidance, the entire AutoZone team continues to be enthusiastic about our future.

We continue to feel confident in our long range plans.

Our plan is a simple one, to provide our customers the parts they want at the prices they demand, with great service provided by AutoZoners who have a great place to work.

If we do these things, we will continue to be very successful.

We remain excited about our fourth quarter opportunities.

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.

We will continue living the pledge in our fourth quarter and beyond.

We continue to demonstrate industry leading financial metrics.

Being a disciplined Company, we have proven our ability to manage cost appropriately and invest in incremental initiatives that exceed our stated 15% 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 touch on our ongoing initiatives.

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

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

(OPERATOR INSTRUCTIONS) Bill Sims, Citigroup.

I have a couple questions.

The first question is on the elasticity of demand for petroleum-based products.

You mentioned that petroleum-based products were a drag on gross margin.

Was it that you were unable to pass along the higher raw material cost to your customers?

Or were you just slow to pass it along, and you think the problem will improve as you go forward in the next several quarters?

To some extent, Bill, it's more about being slow to pass it on.

You always have fluctuations in the overall price and there's always a little bit of a time lag relative to our ability to pass that price along.

So as you continue to have volatility, you continue to have a little bit of pressure on gross margin.

The second question is, as we try to figure out the impact of macro challenges on your business, can you give us any color on traffic versus ticket, and what you were seeing as the quarter progressed?

Yes.

We've said for the last few quarters that we've been challenged on the traffic side, and that trend continued during this quarter.

There weren't any significant changes in that trend.

But are you saying throughout the quarter, or are you saying as gas prices increased, have you seen any impact on traffic?

I don't want to get into specific intra-quarter discussions.

This was really one of the first times that we've talked about anything on an intra-quarter basis, and that was the softness we experienced in early April.

And it was so significant we thought that it was important to highlight that.

But I don't want to get into individual intra-quarter metrics.

And then final question, and that might fall under the same banner head, have comps recovered to pre-April levels, pre-first half April levels?

Bill, the way I would answer that is we specifically called out early April performance as a drag on our performance, and left it at that.

Thank you.

Good luck.

Gary Balter, Credit Suisse.

It's actually Seth Basham for Gary.

A couple quick questions for you.

First, thinking about the improvements you made on the parts assortment, especially on the hard parts side, can you maybe give us a way to benchmark your progress there?

Sounds like you had made progress, but has the mix of hard parts changed significantly versus accessories?

It has not changed significantly versus accessories at this point in time, Seth.

But remember, these products have been coming in throughout the course of the last two quarters.

As we've implemented specific individual categories, we've been pleased with our progress, and we're going to continue to do this.

This is not a one-time event.

This is something we do every year, but this year it was significantly more focused on hard parts coverage.

We've been pleased with those results.

As far as giving you external indicators, the best indicator we can give you is what our comp store sales trends have been.

Okay.

With that in mind, given a normalization of weather patterns, and the progress you've made on the assortment planning, would you expect a pick up in comps?

I'm sorry, Seth.

I didn't follow your question.

Just thinking about the changes that you've made with the assortment planning, you said that you made progress.

I'm just wondering whether or not that suggests that you should have a pick up in comps?

We don't give financial guidance, you know that.

Looking forward, we continue to be optimistic about what we're doing.

I'm very pleased with the progress we've made on our major initiatives, and we continue to be optimistic.

I don't want to get into trying to forecast what's going to happen individually with comps because there's obviously lots of different factors that the go into that.

Fair enough.

And just secondly, looking at the Commercial business, can you maybe quantify what kind of profit improvement you saw in that business?

Yes, we're not going to get into the specifics of the profit improvement.

But it was a significant increase, and it's -- we want to build a model that's replicable for the long-term, but is also significantly profitable.

And we've continued to work on that over the last two years.

And although we've been disappointed, clearly with our sales performance, we have been very pleased with the model that we've built.

As you look at the outlook for the Commercial business, what kind of headwind should we build in for the Midas lost sales?

I wouldn't quantify it just yet.

All I think we're saying is is that there's a little bit of pressure on there.

But at the same time, we've got our resources focused on building that business.

And we're excited about the initiatives, some of the new collateral that we have, et cetera.

So we're very positive about the prospects for the business, but clearly Midas will have a little bit of a short-term impact from a sales perspective.

But as Bill mentioned, we think the profitability of the model continues to remain strong and we're going to continue to build on that.

Yes, Seth, I also said in the comments that we've had a headwind in that business for the last couple years, which has been one of the reasons our business has been soft.

The supply chain business has been soft for the last couple of years.

So we've had some of that in there already.

The other component of it is there's no reason that they need to buy those through a supply chain methodology versus a hot shot methodology.

The trend in the overall industry that we see is more and more people every day going to the hot shot methodology.

So we want to just earn that business on the hot shot side with the same Midas dealers.

Fair enough.

Thank you, guys.

Matthew Fassler, Goldman Sachs.

I'd like to start by talking a bit about Commercial.

Can you shed a little more light on some of the developments that you think are improving your positioning in that business?

And also on some of the changes that have enhanced your profitability in that business, even though the top line has been, I guess still on the slow side?

Yes, Matt.

As we've said before, we're very focused on making sure that we serve the customers that we can serve profitably.

We're not out there chasing unprofitable sales.

We're out there making sure that we're providing the delivery business.

We want to make sure that we provide deliveries that are going to be profitable to us.

So we want to stick to our range of customers within a reasonable range of the store.

The things that we continue to do is really work on the basics of that business.

It's about making sure we've got the right parts coverage, making sure that we deliver when we say we're going to deliver.

Make sure we have knowledgeable customer-focused people on the phones and in the trucks.

And then the piece that we're talking about today that we're optimistic about for the future, is something -- we've got to build a world-class sales organization.

The retail sales approach is very different than going out and making sales calls.

We need to create the processes, the training, and then develop a world-class sales organization through the people.

That's a component that quite frankly, we haven't done a great job of, and we're in the very early stages of doing that.

As we continue to build our model and see that we do provide a great offering to our customers, now we've just got to go tell them about it.

And Bill just to follow-up on that, in terms of customer analytics, which I think was sort of part of the effort for making sure you could execute this business profitably, do you feel like you have the analytical framework at this point to move forward?

And then if you could just shed some light as to the timeline and the numbers and the cost, if any, involved in starting to ramp up that salesforce?

Yes, we don't see -- we have a salesforce that's out there today, Matt, that we've rolled out over the last couple of years in our test stores.

We have been pleased with that salesforce, but we're not getting full functionality of them yet, and we've got to provide them with more tools.

We don't see a significant ramp up in expenses.

We are pleased with the economic model that we've built.

And as you put these costs in place on the front end to set up a commercial program, as you grow that program, the incremental costs are significantly less.

If you could just refresh our memory on how many of your 2,100 and change Commercial stores currently have sort of the most advanced sales model and most developed salesforce that you've got?

About 700 stores, Matt.

So about a third of those.

And final question on this.

Is your view that once you have this salesforce model essentially nailed, that the number of Commercial stores or the penetration of Commercial relative to the chain goes up?

Or do you feel like you've got the appropriate level of coverage at this point with those roughly half of the stores?

I think it would -- our hope is that we will definitely take it up over time.

But our approach at this point in time is to make sure that we build a repeatable model that makes those markets attractive for us and profitable.

In some respects though, our caution is we're operating this business in a pay-as-you go model, and we're very comfortable with that.

Got you.

Thank you so much.

Danielle Fox, Merrill Lynch.

I was hoping you could return to some of the comments that you made early in your remarks about advertising.

Could you just clarify?

Are you simply planning to change the message in your advertising?

Or are you actually planning to spend more advertising dollars to get the word out on some of the changes that have taken place at the store?

Combination of both.

I think really one of the things is that our message continues to be very much focused on trustworthy advice and also promoting the Duralast brand, which continues to be, we think one of of the number one brands in the industry.

At the same time as you know, we talked about Z-net, and we actually launched some national advertising on Z-net just over the last four or five weeks.

So in addition to that, we've shifted a little bit of advertising dollars towards the fourth quarter.

So we think that we'll be well positioned for the busiest selling season of the year with very appropriate advertising , again promoting Z-net, focused on trustworthy advice, and we will have a little bit higher emphasis in the fourth quarter than we did last

And in the past, I think you've had mixed results from incremental investments in advertising.

Is the key difference here that you feel like you have something different going on in the store to highlight?

Or is there sort of -- I guess what is the opportunity that you see with the higher advertising spend that's different than in the past?

Yes, Danielle, I'm not familiar with not being satisfied with our advertising spend in the past.

But we have spent a lot of time over the last 12 months getting ready for this selling season.

We put a lot of new products in place.

We also added Z-net which is a major new customer enhancement.

And then we also have two really strong marketing messages that we are very comfortable with, both Z-net, the introduction of that to our customers, as well as our Trustworthy Advice campaign that tells people come to us, we're going to help you do it right, and make sure that we help you manage your cost, as well.

Thank you.

Dan Wewer, Raymond James.

Bill, now that you've completed the expanding the assortments of hard parts coverage, how would you compare your assortment to competitors that have a larger DIFM focus, such as Carquest, NAPA and O'Reilly?

Where do you think maybe you are superior, and where do you think you could be at a disadvantage?

Dan, it's always challenging to have specific vehicle-specific application information from our competitors.

But what we've seen in the marketplace is we're very well positioned, and quite comfortable that we've really made a shift towards later model coverage, and we'll continue to refine that as we go.

The other piece that we have is our hub stores, where we are going deeper and deeper all the time to learn how early we need to be.

So at this point in time, we are quite comfortable.

Now, it's always evolving, as new vehicles come on roads, as failure rates change, it's a constant evolution.

But we're quite pleased with where we are today.

How have you communicated to your Commercial customers that you now have an expanded assortment and that you deserve the first call?

We have done it through -- you heard us talk on the last conference call about new marketing collateral, and we also mentioned it in today's call.

We've put together category-related marketing collateral that talks about all the key elements of our program on a specific category.

One that went out during the quarter was on the all-important brake category, where it talked about the quality of our parts in both the Duralast and Duralast Gold names.

And it had specific examples in there of where we substantially increased the coverage, and some of the applications where we actually have coverage in all of our Commercial stores.

It's been received quite well.

And -- .

Bill, the other question I had for you was on the electronic loyalty card.

As I recall, that was implemented what, the end of calendar '06?

That's correct, Dan.

And can you remind us how many active accounts are on the system, and what you're learning from that, and how maybe it's changing the way you either merchandise stores or price your product?

It's still fairly early in the process overall.

We are building accounts, to your point, and so we continue to increase our overall penetration in accounts that we have.

We're still at the very early stages.

Obviously, we haven't even cycled a full year yet.

But we are beginning to learn a little bit more about some of the spending habits of what we call our heavy DIYers.

And so I think that we'll be able to utilize that information to support the organization on an ongoing basis.

But I couldn't give you a lot of specifics today, or really wouldn't want to until we get probably a full year under our belt.

Okay.

Great.

Thanks.

Mike Baker, Deutsche Bank.

A few questions.

One, just the $1 million fee you talked about for Midas, that's a fee I imagine that you guys earned.

So I'm wondering if that was in your SG&A, and is that unique this quarter, or is that something that you expect to be ongoing, et cetera?

And then I guess that sort of leads to a broader question, what do you see as your operating profit drivers ahead (inaudible) up 12 basis points this quarter.

You said that gross margin might not be as helpful, advertising costs are going up, you might not get this $1 million fee, I imagine.

So just wondering if we should expect any kind of margin growth at a flat comp going forward, or at this point do you really need a positive comp?

Thanks.

I think that -- look, I think that we have a lot -- first of all, the quick answer to your question is yes, the $1 million was in SG&A.

But on a broader basis, I think that we've articulated a lot of initiatives that we're working on today that we believe will enhance the customer shopping experience, and that we believe will continue to result in improved sales performance and increased market share.

So when you talk about from an operating margin standpoint, we talked about gross margin, we believe that there's continued further opportunity, again, albeit at some reduced rates.

So we continue to believe there's an opportunity there.

We continue to be very aggressive about how we go about reducing SG&A costs.

We talked about one of our initiatives being reverse auction.

It's just one of many examples of things that we do to continue to reduce SG&A cost overall.

But more importantly, I think we're making the appropriate investments in the business, both between inventory, as well as training our AutoZoners.

Z-net Is another great example of an investment that we've made in order to improve the customer shopping experience.

As Bill mentioned during the call, our customer satisfaction scores on a year-over-year basis have improved.

So we believe that on a long-term basis these improvements will continue to lead to enhanced sales performance.

And that's really how we continue to move the operating margin.

Okay, and then I guess Duralast and imports, those I Imagine continue to increase as a percent of sales, also helping the margins?

Yes, absolutely.

The imports again, we're at the early stages, but that's one of many opportunities, but that certainly is an opportunity for us.

And yes, Duralast, which is a great brand name, continues to increase its penetration overall.

So did you give numbers there on how much Duralast and imports are as a percent of sales?

We didn't necessarily.

I would just tell you that the imports currently is a small percentage of sales, but it's an opportunity for us to grow.

Great.

Thank you.

David Cumberland, Robert Baird.

You mentioned higher profitability in Commercial in Q3.

For about how long have you achieved the trend of higher profitability in this business?

I would say that throughout the year, I think that our organization has done a good job at going through the Commercial model and being able to identify opportunities to improve the profitability.

As Bill mentioned before, it's not 100% about sales.

We want to balance our ability to drive sales, as well as drive profitability, and we want to be able to create a model that can sustain that on a long-term basis.

And then my other question, with Midas, what is the portion of your business with them that's already done on a hot shot basis?

About half of the business with them today is hot shot, and about the other half is supply chain.

Those are pretty round numbers.

Thank you.

Tony Cristello, BB&T.

I guess one of the questions, when you look at your sort of parts coverage and the hard parts assortment, when you go to the installer level now in terms of trying to displace an incumbent or move up that call list, loyalty, obviously, is something that's difficult to overcome.

Do you feel like AutoZone has now established itself, not only on the inventory side, but on the customer service side and the parts and knowledge side to that Commercial customer to be known as a destination spot for Commercial product?

Yes, Tony, I think we've made great strides in the last 12 to 18 months.

Are we completely finished with that?

No.

But obviously, the inventory additions have made a huge improvement.

We've talked a lot about PDAs in the past, and the fact that they help us manage our customer service and also help us measure our customer service.

So we've been pleased with that.

The piece we want to focus on going forward, now that we're getting reasonably comfortable with our foundations, is we've got to go out and tell our AutoZone story.

And we've got to be in those shops and asking for the sales and talking to our customers if they have any objections on what they are and how to overcome those.

And can you just remind me, is that at the local level from a sales standpoint in terms of targeting that commercial or the professional installer?

Or do you also have sort of a regional layer that sort of targets opportunities and then filters that down to the local level?

We do it both ways.

And specifically, we have a national account salesforce that focuses on the national players.

And then we also have divisional and regional commercial sales managers who will focus on regional service providers.

And then -- but the biggest part of it is at the street, at the shop, with the person who is ordering the parts on a daily basis.

That's where the biggest part of the focus is.

And with the new parts assortment, are you seeing a greater mix of the -- maybe the Duralast Gold brand from the Commercial side?

Or is there still traction at some of the lower levels of the Duralast product?

They are coming in both.

Over time, we've increased the coverage in specific categories for Duralast Gold, and when we've done that, we've seen them be very well received in the marketplace.

In other places where we didn't see them that well received in the past, we've pared those back, and the Duralast brand is a great brand, as well.

Okay.

And then just on the Midas issue, when you look at -- was it 2003 when you entered that agreement with them?

I believe that's right.

Okay.

Was the level of run rate in total for what you were doing, supplying them parts in 2003, how much did that deteriorate, if any, from where you are now?

I guess meaning have you already lost some of that business under that contract just because the environment has become more aggressive, more people trying to attack the DIFM space, and therefore, the incremental loss may be less as you sort of anniversary this?

Yes.

We have lost substantial amounts over the last couple of years, but it's not necessarily due to the level of competition.

I would really attribute it to two other things.

Number one, the exhaust business, I think you all have seen over time has continued to decline.

I think they've talked about it in all of their conference calls.

And we have changed our relationship, even over the last year and a half, with how we manage exhaust, and that impacted it.

But the bigger piece is most of the shops are finding that as parts proliferation continues, it's uneconomical to carry a lot of parts on the shelf on your shop.

So it's much more productive to buy them from a hot shot provider, from people like us that have inventory already deployed around the country.

Great.

Thank you.

John Lawrence, Morgan Keegan.

Bill, just real quick.

Not to beat the Midas thing to death, but just quickly, as you transition out of that at the end of June, what -- just from your resources I assume there's some distribution expense that goes away, and you can target that -- allocate that more toward a sales process.

Is that the way to look at that?

Yes, they're -- the vast majority of the expenses related to supporting that supply chain business are all variable, John.

And then secondly, if you jump back to direct imports, can you -- I know you started the process and you're early in the game.

Are we still in a methodical standpoint of trying to figure out suppliers, or how those shipments are arranged?

Can you just talk about strategy versus execution at this point of getting that direct import program?

Yes, I wouldn't characterize it as cautious as that.

I think we're more aggressive, but we are cautious on individual manufacturers as we get to know them.

We have spent a considerable amount of time over there in the last two months.

I can't tell you how many people from here have been over there looking for new opportunities and working with existing suppliers.

We're pretty comfortable we've worked out the logistics on it, and so as we find new opportunities, we're going into them full steam ahead.

Great.

Thank you.

All right.

Before we conclude the call, I'd like to take a moment to reiterate that we know we still have a tremendous amount of work ahead of us.

While we have an incredible business model built on a strong foundation of disciplined processes, focused on delivering great customer service, we understand we cannot take anything for granted.

As we continue to focus on the basics and never take our eye off of optimizing long-term shareholder value, we are confident we will continue to be incredibly successful.

I thank you very much for participating in today's call.

Thank you for joining.

That concludes today's conference.

You may disconnect at this time.