汽車地帶 (AZO) 2008 Q3 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

(OPERATOR INSTRUCTIONS) Please be advised today's call is being recorded.

If enough any objections, please disconnect at this time.

This conference call will discuss AutoZone's third quarter financial results.

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

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

Central time, 11 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 the 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 of 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.

Forward looking statements are subject to a number of risks and uncertainties, including without limitation, competition, product demand, the economy, credit market, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, engine prices, war and the prospect of war, including terrorist activity, available consumer transportation, construction delays access to available and vehicle financing and change in laws and regulations.

Forward looking statements are non-guarantees to future performance and actual results, developments and businesses may differ from those contemplated of the forward looking statements.

Such events could materially and adversely affect out business.

Forward looking statements be only as of the date made except as required by applicable law.

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

Actual results may differ from anticipated results.

Please refer to the risk factor section laws on form 10-K for the fiscal year (Inaudible) 2007 for more information related to those risks in addition to the financial statements generally accepted of accounting principals.

AutoZone has provided metrics in this presentation that are not calculated in the quarterly GAAP.

For reconciliation of these metrics, please see AutoZones press release in the investor relations at www.autozoneinc.com.

Mr Rhodes, you may now begin.

Thank you.

Good morning and thank you for joining us today for AutoZone's fiscal 2008 third quarter conference call.

With me today are 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 had an opportunity to read our press release and learn about the quarters results.

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

Please click on quarterly earnings conference calls to see them.

To begin, I would like to thank our entire organization for the strong results delivered this past quarter.

We are proud to talk to you this morning about a seventh consecutive quarter of double-digit EPS growth, particularly, in the light of what continues to be difficult macro environment.

We certainly are aware and understand the challenges of inflation, higher gas prices and dropping home values have on customers.

Operating successfully in this environment requires a organization to execute at a very high level and I appreciate the efforts of all AutoZoners and what they put forth every day.

Our success this quarter can be directly attributed to executing the initiatives we outlined at the beginning of the fiscal year.

These initiatives focus on improving our in-store customer shopping experience, increasing our AutoZone training efforts and accelerating our commercial growth strategies.

In addition, with our competition continuing to execute their strategies, we know we have to be vigilant and improving our customer's experience to continue to deliver strong performance.

From those key initiatives, we increased our gross profit margin, managed our operating expenses well, although, we delevered or a percent to sales basis.

Continued to effectively manage our capital structure and positioned ourselves appropriately for growth heading in to this fourth quarter, our traditionally largest sales quarter.

Let me provide a quick summary of some activities during the quarter that contributed to the results.

We held a Spring sales meeting for our Senior Field Management just after last quarter's conference call to introduce key tactics and new selling programs heading in to the second half of the year.

At that meeting, we announced we were adding some additional district managers to reduce the number of stores our DM's support individually.

We felt it was and continues to be essential for us to have the right amount of focus on our stores to support customer service.

At this meeting, we also announced a commercial reorganization to more affectively drive sales efficiencies and productivity.

The new organization leverages our sales leadership team more affectively, and improves our ability to execute sales strategies and tactics on a consistent basis.

It also provides increased flexibility to add additional feet on the street., which is an essential element of our commercial growth strategy.

We held our annual vendor summit here in Memphis to review both past performance and future opportunities and challenges.

Working closely with our vendors to gain alignment on strategies and tactics is an important element of our future success.

With approximately 500 people in attendance, the interaction we had with our vendors was constructive and the feedback was very positive.

We continued to add inventory to the stores.

While not a new discussion for us on a per store basis, managed quite affectively, we feel additional coverage is making a difference for us, for now, and for the future.

About two years ago, we rolled out a new significantly enhanced merchandise assortment planning process.

That too has allowed us to capture more than ever before lost sales information.

Unique to this data capture is our ability to track our yes percentage separately between retail customers and our commercial customers.

Over the two years we learned a lot and continue to further develop and enhance this process.

We learned where many of the short falls lie and where many of the excesses exist.

Last year, we discussed the addition of $70 million in additional inventory we felt was immediate low-hanging fruit.

Today, we are on track to add a similar amount of incremental inventory this year.

At the same time, we have been diligent in rationalizing excess or nonproductive inventory to make room both physically and financially for this incremental inventory.

Fourth, we initiated a robust sales training effort to support our drive to develop a best- in-class commercial field sales organization.

We understand we are a organization that grew up with a retail focus.

While we recognize that and are proud of our many industry leading efforts, we also need to make sure we are supporting our professional commercial customers with all the requirements they are demanding.

Quickly, before we review the specifics of our performance, I would like to answer a question we expect many will want to ask later in the call.

That question is, "Why do you think your sales performance overall has remained similar to previous quarters, while the economy has been undoubtedly challenged by recessionary pressures and while gas prices reached record levels."

We believe our industry provides a valued product to consumers in difficult times.

We had to make sure our stores are well stocked with the right merchandise to help customers save money.

It's no surprise that many of our marketing messages have and will continue to be built around saving money and improving fuel mileage, for example.

We believe, we are executing at the store level better.

While we understand the efforts are no guarantee for future results, we believe our formula is the right one for the long term.

For the agenda this morning, I will review our overall financial results and go in to the detail regarding the sales initiatives, commercial initiatives and Mexico.

Bill Giles will perform more detail on our earnings performance, as well as, an overview of the balance sheet and cash flow for the past quarter.

Finally, I will provide a few closing comments before q-and-a.

Regarding the third quarter for the 12 weeks ended May 3rd, we reported sales of 1.517 billion, increase of 3% from last year's third quarter.

Same-store sales for stores opened more than one year were down 0.3% for the quarter.

Retail sales showed a modest deceleration versus the previous quarter, our customer satisfaction surveys continue to confirm that we are improving the customer shopping experience.

Regarding our commercial business, we continue to be pleased with the progress we are making.

This marks the fourth consecutive quarter of positive sales growth and we are especially pleased to report acceleration in the sales growth as we progress through the year.

While our retail business remains our largest most profitable business, we are excited by what commercial can represent for us on a sales growth and profitability basis for many years to come.

In the second quarter, gross profit as a percentage of sales up 32 basis points versus last year's quarter.

Operating expenses as a percentage of sales, increased by 30 basis points.

This resulted in a operating margin of 18% of approximately two basis points from last year's quarter.

Operating profit increased 3% verses the prior year.

Net income for the quarter was 159 million, diluted earnings per share increased 14.7%.

to $2.49 from $2.17 in the year ago quarter.

Our continued discipline capital management approach resulted in return on investment capital for the trailing four quarters of 23.3%.

This increase showed a slight improvement versus last quarter and a more material increase versus last year's third quarter.

Return on invested capital is a key measure of our success.

We have and will continue to make investments that we believe will 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 earnings per share.

I would like to talk in detail about the sales results.

Total domestic retail sales up 1.5% for the quarter.

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

As I mentioned earlier, we feel our store execution continues to improve.

During the quarter as is customary, we experienced regional discrepancies in the sales performance driven by many factors, both positive and negative.

Weather was a contributor to our sales performance, as it always is.

This quarter, the weather was slightly cooler and wetter than the previous year.

However, over time the weather impacts tend to balance out.

While the economy continues to challenge our customer's pocketbooks, we did not see a material shift in sales mix to lower price point merchandise.

We continue to believe, we have opportunities to sell our customers on the benefits of our good, better and best assortment to offer the appropriate value proposition to every customer.

This is a key component of our AutoZone training efforts.

During the quarter, we continue to improve the capabilities of our new parts catalog, Z-Net, and continue to highlight the terrific customer service enhancement in our marketing campaign.

We believe Z-Net continues to gain traction with customers, as we are able to better provide better more comprehensive information to our customers, and assist them with their needs more quickly.

Again, we feel we are executing well at the store level, however, there is always room for improvement.

In addition, we have monitored and responded to what our customers are telling us.

Through our customer satisfaction surveys, our customers are telling us we are offering them a more compelling shopping experience.

Although, we are making meaningful progress on the initiatives, we are not satisfied with the sales performance this past quarter.

We can improve our performance from these levels through several selling opportunities.

While there is head wind our customers are facing, we feel if we continue to refine and enhance our product offering, to increase our ability to say yes, we can grow sales from here.

As an example, we added late model parts coverage to appeal to the commercial customer base and continue to be pleased by how the parts are being purchased by not only the commercial customers but retail customers as well.

We will continue to be aggressive on our merchandise category updates.

Let's turn to macro trends.

During the third quarter, unleaded gas prices started out high at $2.96 a gallon and went up from there.

Finishing the quarter at $3.61 a gallon.

This 22% increase was the highest this year.

However, last year as well experienced high prices finishing at over $3 a gallon.

We cannot control the prices of gas at the pump.

However, with more vehicles on the road than ever before, our ability to grow sales remains strong over the long term and we believe consumers will ultimately adjust their spending habits for the higher prices.

We will continue to develop marketing programs that support our customers needs during the high priced times.

For the quarter, gas prices had a negative impact on our sales performance.

Regarding miles driven, we saw a decrease in miles driven in January and February, neither March or April is available yet.

Through February, miles driven decreased for four straight months versus the previous year, decrease that hasn't been seen in many years.

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

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

Miles driven have been challenged recently, there by causing a challenge to the overall business, there has been a positive impact from more registered vehicles seven years old and older on the road.

Quite frankly, more than in the country's history.

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

Consumer price inflation in Q3 remained in the low single-digit range.

While we do expect some increase in sales due to the recent financial stimulus checks issued to the american public, we do not expect it to have a material impact on our overall results.

For example, back in 2001, we could not conclude that the checks issued had a material impact on our sales.

For the trailing four quarters, sales per square foot $236.

Statistic continues to set the pace for the rest of the industry.

Now, let's turn to commercial.

For the quarter, total commercial sales posted in increase of 6.3% versus last year's quarter.

We now have the commercial program in 2,233 stores supported by 136 hub stores.

We are encouraged by the progress we are making on the commercial initiatives and by the response we are seeing from our customers' purchasing habits.

There is much work to be done.

With such a small share, approximately 1.5% of the overall market, we believe there is significant opportunity to gain further share.

As mentioned on previous calls, there continues to be a subset of commercial programs, approximately 1200 supported by additional selling tools.

While we do not quantify the difference in results by these 1200 programs sell versus the remaining programs, our results encourage us enough to continue to grow the subset of commercial programs.

A key element for growing our commercial business is to be able to meet the parts coverage requirements of our customers.

Many customers call several times a day.

They expect consistent service .

Most importantly, they expect us to carry the parts they request and get them delivered on a timely basis.

We have to make sure we can continue to better understand their expectations and work diligently to meet or exceed expectations every day.

First, let me address their parts needs.

To address this need, we expect to add as much new coverage this year as we did last year.

As I mentioned earlier on this call, about two years ago, we began to track how often we were able to say "yes" to customers when ordering parts.

Tracking the sales and more importantly, lost sales, separately between commercial and retail.

It wont surprise many to hear our commercial "yes" percent was and has been lower than retail percentage.

Not at the same level as retail, we have identified many opportunities to close that gap.

Let me step back a moment and explain what some of the historical challenges have been to adding the inventory.

For one, the commercial parts life span is shorter than retail.

Commercial customers are primarily demanding parts for newer models.

At a certain point depending on the vehicle and customer demographics, cars reached that target OKV range.

At this age where the car owner becomes traditionally a retail customer.

Our category reviews are addressing those needs better than ever before.

Lastly, we continue to be pleased with the customer feed back we are getting related to the Duralast and Duralast Gold product offerings.

Beginning next month, we will launching a new product line under the Duralast Gold banner.

We are very excited to be launching the new Duralast Gold C-Max line of brake pads.

This completely new offering of ceramic brake pads has new features and functions that are sure to satisfy the needs of our commercial customers, in a product offering they are frequently requesting.

Secondly, we have been adding field support for the business.

We have been sharpening our message to our customers, working more diligently with our customers to address gaps with both our parts coverage and service offerings.

We are continuing to build a selling culture around taking care of customers that traditionally, we have not consistently serviced.

With the data we collected over the last two years we are addressing a needs on a customer by customer basis.

We also developed and implemented a number of sales tools and processes over the past year, as we continue to improve the quality and effectiveness of our field sales organization, these tools and processes are gaining momentum and improving our performance.

We are now able to communicate with the customers appropriately.

Targeting key categories with individual customers.

We are letting customers and AutoZoners know we care about this business as future growth.

We are committed to putting the resources in place for future growth.

Our sales growth has been coming from existing customers growing the weekly purchasing volumes, along with addition of new customers.

Primarily, we are focusing on what we have called, primarily the "up and down the street customer".

They are the one and two store customers who represent a majority of what our industry, the AAI, stages the largest customer segment.

Our focus has been as with retail on improving the commercial customer service.

Frankly, we understand at the end of the day, all our commercial customers are doing business at the local level.

The local shop manager determines who they are going to pick up the phone and call when they need a part or product.

We are pleased with the progress but have significant additional work to do before we reach our goal of developing a world-class commercial sales force.

We are in the early stages of growth as we represent a small market share across an industry that is larger than retail.

We remain committed to building this business for the long return.

We are excited about our potential in the business and believe over the long-term, we can expand the percentage of stores that operate a commercial program, we will remain committed to developing a sustainable profitable business model.

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

Over time, we believe we can grow sales in the existing commercial stores, as well as, open additional programs where appropriate.

We believe all the items we have been discussing are building momentum.

Each of these pieces must work in a cohesive manner for us to not only attract new customers but improve penetration with the existing customers.

Let's turn to Mexico.

Our Mexico stores continue to perform well.

We opened two new stores during the third quarter.

We currently have 130 stores in Mexico.

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

Now, I will turn it over to Bill Giles to discuss the remainder of the income statement, cash flows and balance sheet.

Thanks Bill.

Gross margins for the quarter was 50.2% of sales.

Up 32 basis points compared to last year's third quarter.

In the third quarter, margins continued to benefit from the ongoing category management initiatives, supply chains efficiencies and our continued focus on lowering acquisition costs, which include increasing our direct import efforts.

Over the last several quarters, these efforts have been partially offset by a increase in product cost, specifically related to oil-based products and other commodities.

We focus on ensuring we offer the right products at the right prices to customers.

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

Our Duralast, Duralast Gold and Valuecraft lines show sales increases for the third quarter.

Customers continue to recognize the value of proposition these high-quality brands offer.

Going forward, we believe their continues to be opportunity for gross margin expansion all be it at reduced rates.

We do not manage targeted gross margin percentage as the key focus is on increasing gross profit dollars.

SG&A for the quarter was 32.2% of sales up 30 basis points from last year.

Our deleverage came primarily from continued higher occupancy costs, specifically, rent and depreciation were approximately 17 basis points higher than last year's second quarter, which reflected higher percentage of lease versus owned stores.

For the long run, we feel in order to leverage SG&A, we will need an approximate 1.5% to 2% same-store sales growth.

Currently, we believe our expenditures towards improving customer service will pay dividends well in to the future.

EBITDA earnings before interest and taxes for the quarter was $273 million.

Up 3% over last year.

Interest expense for the quarter was $25.3 million compared with $27.1 million a year ago.

Debt outstanding a the end of the quarter was $1.932 billion or approximately $7 million less than last year.

Decrease in interest expense, reflects lower short-term borrowing costs.

Our adjusted debt levels at 2.1 times adheres this quarter to our historical guidance of 2.1 times.

We purposely manage our capital structure relative to cash flow in order to maintain credit ratings at investment grade and optimizing our cost of capital.

For the quarter, our tax rate was approximately 36%, below last year's rate of 36.3%.

As this quarter's rate included the settlement of a relatively small discrete tax event, we expect to return to a more normalized run rate of 37% for the last quarter of 2008.

Net income for the quarter of $159 million was up 4.6% over the prior year.

Our diluted share count of 63.8 million was down approximately 9% from last year.

The combination of the factors drove earnings per share for the quarter to $2.49 up 14.7% over the prior year.

I would like to take a moment to remind everyone that our 2008 fiscal year has an extra week in it.

Every six years or so, our fiscal year has this 53rd week in the fourth quarter.

So at the end of this fiscal year, we will be talking to you about EPS numbers that include an extra week.

We do not provide guidance on a earnings impact this extra week will have on the business, we would like to remind everyone, the last time we did report a fourth quarter, with an extra 17th week was fiscal 2002 and reported a impact of $0.18 per share for the period.

At the time of reporting, we will break out the impact this extra week had on the business.

Relating to the cash flow statement in the third quarter, we generated $204 million of operating cash flow and we did not repurchase any AutoZone stock.

Year to date, we repurchased approximately $350 million as part of our stock repurchase program, compared to $464 million during the same time period last year.

As you recall, we accelerated a portion of the annual purchases during the first quarter.

As we stated then, we were committed to getting back to our 2.1 times credit metric by the end of the year and able to do so by the end of the third quarter.

Let me discuss how we think about spending operating cash flow.

First, we spend appropriately on the existing store base.

Second, we spend capital on the opening of new stores and finally, we return any excess capital to the shareholders.

For the third quarter of this year, we reported an industry leading ROIC of 23.3%.

Proud to report this metric continues to improve over last years already industry leading rate.

Finally, I would like to take a moment and update you on the inventory levels in total on a per store basis.

Reported inventory balance of 2.1 billion, up approximately 6% versus the Q3 ending balance last year.

However, last year's number excluded $31 million in pay on scan inventory, which was not included in the GAAP numbers.

We have slowly reduced the inventory balance held as pay-on-scan over the last several years.

Today we have approximately $7 million in inventory, on our pay-on-scan program.

Our adjusted inventory, including pay-on-scan inventory was up approximately 5%, versus the previous year's quarter.

This increase is primarily being driven by our new stores opened over the last year representing approximately 4% more square footage than last year.

Therefore, on a per store basis, we reported $508,000 up slightly from last year.

Also, keep in mind, we added additional parts coverage through the category line reviews.

Accounts payable as a percent of gross inventory finished the quarter at 88.9%.

Total working capital was $3 million, verses last years balance of 71 million.

We will continue to focus on minimizing working capital as this past quarter reflects.

We are committed to continuing our on going focus of increasing cash flow.

Net fixed assets were up 5.7% versus last year, capital expenditures for the quarter totaled $58 million reflected the additional expenditures to open 37 new stores this quarter, along with maintenance on existing stores, work on development of new stores for upcoming quarters and the expected Summer opening of our new eighth distribution centers in Hazelton, Pennsylvania.

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 US in the mid-single digit growth rate for the foreseeable future.

We opened 32 new stores in the quarter for a total of 4,032 stores in 48 states the District of Columbia, and Puerto Rico.

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

Depreciation totaled $38 million for the quarter.

Higher than last year due to new stores.

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 tripled B-plus and a commercial paper rating of A2.

Moody's investor service has assigned us the senior unsecured debt credit it of BAA-2 and a commercial paper rating of B2.

Now, I will turn it back to Bill Rhodes .

Thanks, Bill.

While we are certainly pleased to report record earnings and earnings per share for the quarter, we understand we must stay focused on growing retail and commercial sales.

We clearly understand our success is driven by our customers daily experience with us and we must continue to enhance this experience.

As I said earlier, this quarter was about our continued focus on executing the game plan of improving the in-store customer shopping experience.

Our AutoZoner training efforts and building momentum on the commercial growth strategies.

These efforts were enhanced by adding new inventory where appropriate.

Our story will remain consistent into the fourth quarter of this fiscal year, a focus on steady, profitable sales and earnings improvement.

Refining inventory assortment.

Continual training of our AutoZoners.

Expanding our commercial business and prudent profitable growth in Mexico.

While we were pleased with our execution in the quarter, we do believe we can grow sales in to the future, both retail and commercial sales.

We have to continue to enhance value proposition to our customers.

Even as our survey results tell us the AutoZone shopping experience remains appealing, we cannot rest on our morals, I would like to mention the subject that has not come up on the call yet.

That is industry consolidation and what it means to AutoZone.

Frankly, we believe it will have a positive impact on the industry over the long run.

As one competitor recently has announced the acquisition of another, we are encouraged to see growth coming from replacement and not the addition of new brick and mortar.

However, let me be very clear.

We are determined to maintain and hopefully grow our market position from here.

We are not satisfied with sales growth in the low single digit range.

As long as we have opportunities to open stores and commercial programs that exceed our hurdle rate of investment and we certainly do.

You should expect to see us expanding our presence.

We continue to feel confident in our long range plans.

We believe we have opportunity for growth in all three strategic priorities, retail, commercial and Mexico.

Customer service will be the key point of differentiation.

AutoZoners across the company are committed to providing the "wow" customer service our patrons grown to expect.

We will focus on improving the trustworthy advice our AutoZoners deliver to enhance training for the AutoZoners in providing them with the tools they need.

As we continue to demonstrate industry leading financial metrics, we remain cognizant of the investors capital.

We continue to remain focused on optimizing long-term shareholder value.

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

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

I would like to open up the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Gary Balter, Credit Suisse.

Your line is open,

Good morning.

It is actually Seth for Gary.

Good morning, Seth.

Congrats on a nice quarter.

Thank you.

A couple of quick questions on the commercial program, if I may.

First, you added a lot of inventory into the box to drive the sales.

Trying to get a sense of how much more inventory can you add?

How can you look at that going forward?

I think it is important to note, first that we have added quite a bit of inventory, $70 million last year.

On track to do similar amount this year.

We have been aggressive in managing out excess and nonproductive inventory.

As I mentioned, we are focused on making sure that we make room for the new product physically and financially, that's been a big part of our strategy and will continue to be going forward.

Also, I mentioned that the life span of the commercial products is shorter than it is on the retail side.

And so it causes us to constantly update even more frequently our product assortment, you will see it churning more than it did historically than just focused on retail.

Okay.

It seems like you struck on the winning formula to grow the commercial business.

You sill only have programs in 55% of your stores, are you looking to accelerate that penetration?

We hope over the long-term to increase that penetration.

That's not a key key component of what our strategy is today.

We are looking every day to add a few programs.

It is not a big focus.

Our big focus is making sure we improve our value proposition to our customers and do it with the customers we have today and the programs we have.

That is a component of our long-term strategy.

One last question if I may, just thinking about the business over all, can you give us color on regional strength and weakness.

We mentioned in our prepared remarks, we saw fluctuations on our regional basis.

Quite frankly, I think, the biggest part of fluctuation we believe comes from us in our execution in those individual markets.

We saw nothing material worth highlighting.

Thanks, guys.

Thank you.

Our next question comes from Dan Wewer, Raymond James.

Your line is open.

Thank you.

Bill, when you 're looking at increasing your "yes" percentage or your in stock percentage for commercial and "do it yourself", do you have a sense to how much that is adding to your same-store sales growth or total revenue growth?

We do specifically on specific categories, Dan.

We can see it.

We have not disclosed what that number is.

It's a key component of our success in the business.

Not only a key component for the sales that you get that for that category.

When the customer calls you and you don't have it, then they are likely to move you down the call list over time if you don't yes frequently enough.

How would you say the sales benefit from the extra $75 million added in fiscal year '08 compares to the benefit of the 75 million in 2007.

Last year's benefit will be bigger, because as I mentioned, we took the low-hanging fruit but learned a lot.

We feel confident that the inventory we are adding is going to be productive.

You were able to improve your gross margin rate despite the sales mix in commercial.

It's always been assumed that margin rates and commercial programs are lower than do it yourself.

How much has that GAAP narrowed?

Dan, it's narrowed a little bit.

We continue to have opportunities on gross margin on dry side the commercial side and so I think overall, there is certain strategies that apply to both sides of the business, we have been successful in executing them.

We feel good about the health of the gross margin overall and pleased we are able to demonstrate an improvement in this quarter.

The last question I had, we obviously your initiative to focus on commercial are working, are there thoughts about putting together some new programs to stimulate your "do it yourself" penetration for is AutoZone's 'do it yourself" sales productivity so high that further gains will be difficult to achieve.

No further gains would not be very difficult to achieve.

Obviously, it's a more mature business for us.

But it's something we are working on diligently every day.

We are not satisfied with the performance in retail.

Obviously, there is a lot of influences that are going on.

We are not dissatisfied but not meeting our aspirational levels.

We are doing a lot of things along with product assortment improvements.

We are spending a lot of time on improving the training in the stores and making sure that our AutoZoners are motivated to give that great trustworthy advice.

Thanks and good luck.

Thank you.

We have a question from [Collin McRenahand], Bernstein.

Your line is open.

Thank you.

Good Morning.

Wanted to follow up on the commercial program as little bit.

In the 1200, the subset of programs where you got these modified or different tools and processes, two questions on that.

First, what would you - how would you envision the pace of expanding that to the base of the 2233 programs now that you absolutely are seeing traction.

Hoping you could give color and specificity on what the different processes are and what the tools are in the subset of programs.

Okay.

First of all, let's start with what are the difference in the programs.

The biggest part of the differences in the programs are the sales resources that are provided to that program.

Number one.

They have what we call a territory manager.

Outside sales representative, that also works with the AutoZoners in the box to make sure we are delivering great service.

That would typically have about 10 stores that it supports.

The stores that are not on the program, do not have a territory manager associated with them.

Inside the store, the commercial specialist has incentive compensation.

There are a few other elements but those are the main elements.

As far as how fast are we going to grow it, we have been prudent with how we roll it out over time and expect us to remain prudent.

We are confident it is the right thing for those 1200 stores.

But obviously we picked the 1200 stores because we were putting new resources and incremental costs in there.

We started them with a higher volume stores because they could justify it.

As we get to the low volume stores, it gets more complicated to justify.

As we improve our overall program in performance, it gives us the opportunity to continue to expand it and we hope that will continue.

Is part of the prudence managing the margin, negative margin impact of the higher costs of these programs because of the sales traction, builds over time?

We have a term we use around here.

It's called pay-as-you-go.

That's what we have been doing with the roll out of the program.

Roll to it the next set of folks.

Make sure that it pays for itself.

Get traction in it.

Provide additional margins and roll it again.

Okay.

Second question, can you talk about the impact of higher fuel on your distribution costs overall and how your hedged at this point?

And we are not currently hedged.

We have not been hedged this fiscal year at all.

On hindsight that looks like that was a bad decision.

We haven't spent a lot of time talking about our supply chain but they have done a phenomenal job over the last three years of continuing to drive incredible efficiencies out of that business.

We haven't had to call out the impact of fuel.

Obviously, we have a big fuel component on the outbound distribution processes.Also, we manage most of the inbound freight and getting fuel pressures there and then we also have the commercial fleet where we are having fuel pressures.

We have a lot of pluses and minuses throughout the business, this is something we can manage.

If it goes to $6 or $7, which nobody seems to be talking about, in terms of bigger component but I think we can manage it over time.

Thank you very much.

Good luck.

Our next question comes from Matthew Fassler, Goldman Sachs.

Your line is open.

Thanks a lot, good morning to you.

I guess my first question relates to your SG&A line.

You showed excellent expense control over the course of the quarter in the year to year growth in the SG&A dollars moderated essentially on the same store count.

Can you comment on how proactively you managed the SG&A.

Obviously, you thought there is some sales volatility in the industry.

Presumably, you experienced it as well.

The quarterly comp is identical to the prior quarter.

Any color on that would be helpful on whether that represents a tighter expense run rate than you had or hope to carry forward or something that's representative of what you should be doing.

The organization did an outstanding job of managing expenses throughout the quarter.

We got out in front of it.

We recognized some of the head winds from a macro standpoint.

We reacted appropriately.

We have been careful about trying to make sure that we are not cutting expenses in areas that our customers are facing.

We have been able to find efficiencies just in how we operate the stores and a lot of front.

There are a lot of places where we have been very successful in reducing expenses.

I think we will continue those as we move in to the fourth quarter, as well.

The second question relates to the buy back.

You all have been explicit about your leverage caps from time to time you have come quite close to them and bought stock back.

I'm curious as to whether the current credit environment, particularly, the discerning nature has you -- I guess sticking a little more rigidly to some of the targets than in the past.

I would say no.

Obviously we are cognisance of it.

We accelerated share repurchases and bought [$251] in the first quarter and we exceeded our 2.1 credit metric and we committed to returning back to our 2.1 credit metric.

.

We were pleased we were able to do that by the end of the third quarter.

Even though we committed to it by the end of the

One final question.

You, obviously, have ramped up commercial sales effort.

One of your other competitors has a similar effort, not identical.

I'm wondering if you talked to your commercial sales managers in the field -- you are obviously winning more than your fair share given your market share gaines.

Are you seeing increased competition to become first call for some of these accounts at this point?

I hate to disagree with you.

When we have 1.5% market share.

We are not winning any where close to our fair share.

I understand your point.

It's still an incredible fragmented industry.

If you roll all the top five players together you're talking about 20% of market share.

Are people taking notice of us in the marketplace more than they have in the past?

Yes, but we are still such a small component of it.

But I don't we see increased our position on a material basis.

Got you.

Thanks so much.

Our next question comes from John Lawrence, Morgan Keegan.

Your line is open.

Bill, first of all, would you comment on the new store performance on the retail side as you open these stores.

How are they doing in this environment and, as you look at the pipeline for growth in some of these markets.

Just sort of comment on that, please.

I think overall, new store performance, it has been relatively consistent actually over time.

So we havent seen any significant gyrations in our new store performance overall.

I would categorize it as relative consistent.

From the pipeline perspective, we continue to see real estate costs are still relatively firm.

We have seen some minor decline in construction cost overall.

We continue to find ample opportunities for us to penetrate existing markets, as well as, some new markets, smaller markets, so we continue to have a good breath of assortment from a real estate portfolio standpoint with both new and existing markets.

Second question, everybody has a commercial question.

So - if you look at the best way to look at going forward with the new sort of productivity you are getting out of commercial, would you comment that as you look at the places, Bill, as you point out, it has to pay-as-you-go, have you identified some of the customers earlier in the pipeline that could be successful commercial customers than two or three years ago and waiting for that sort of time frame of when they could be added to the mix?

John, most of the customers we would add would be because we add a new program.

When we are going to add a new program, we do a very extensive market analysis.

We know who the customers are well before we ever go in.

We begin cultivating the relationships prior to opening up that actual commercial program.

What we have really been focused on is rather than expanding the footprint, let's expand our penetration with existing customers.

Let's prove to them and prove to ourselves that we have the right value proposition that gives them a compelling reason to pick us instead of somebody else.

That's where the biggest part of our focus has been.

Thanks guys.

Congratulations.

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

Good morning, everyone.

Good morning.

First question is on the commercial program, how much does the change in incentive compensation impact the profitability on EBITDA basis on the programs?

I don't think it really impacts -- we obviously hope that it improves the profitability standpoint that we are generating the right kind of behaviors through our compensation program that will more affective overall because again, we are looking to draw in business and incentive people appropriately.

So we are looking at it as a positive fact.

My second question is, can you comment on the impact of inflation on your private label brands?

Are there price locks or vendor price increases that might be changing in the future?

Difficult to get too far in to the future.

One thing we seen a lot of pressure on is private label but on the commodity price.

Also, see pressure on steel prices and continue to see and expect that steel prices will continue to have pressure going forward as well.

Overall, I wouldn't say that there is anything from private label perspective that is significantly different than anything else we are seeing.

Are those increases is the industry passing those on one for one at this point.

Nothing is one for one but for the most part we have been successful on passing on costs typically we have.

Great.

Thank you.

Our next question comes from Tony Cristello, BB&T.

Your line is open.

Thank you.

Good morning gentlemen.

Good morning.

When you look at the traction you're gaining with the commercial accounts, is the margin on the incremental business tending to be more positive than what you have seen with accounts that you don't have that level of traction with?

I would say not particular different.

We haven't seen significant swings one way or the other in our margin, overall net margin.

Obviously on individual store level, you can get significant increases in margin as you increase your penetration with those existing customers, particularly if they are within your tight service radius.

Okay.

When you look at the incremental inventory that you added, has there been a net amount that's comes out of 70, 75 million or is that sort of the total incremental hard parts addition?

I would say that thats - there has been more of a net amount.

With that $70 million represents is a freshness from inventory perspective, Particularly in later model coverage.

As Bill mentioned earlier, we have done a good job on trying to get the bottom end of the inventory out as well, which is why on a per store basis you seen a less than a 1% increase.

How much of that inventory is primarily geared towards commercial or are your diy sales benefiting as well?

It's a great question.

For the most part the focus of putting that inventory in has been generated for the commercial business, but because so much of our business is in retail, we find that 50% or more of the sales end up on the retail side.

That changes from category to category and changes based upon how forward you are with the year, make, and model of the years.

But still tremendous amount comes through on the retail side.

Okay.

Maybe just two general questions.

You talk about shrimp being up a little bit.

Is is that a function of the economy or something that is going on as you're adding more inventory or clarification on that.

I think it's hard to know exactly.

I give some credit to it the fact that the economy is down, if you look over time, it's a bit of correlation.

We are going to work hard at making sure we reduce rank again.

How is your turnover been at the store level?

Pretty good.

Our turnover rates, we work hard at it.

Field organization, nature organization worked hard through training and other aspects and our turnover rate is down a little bit.

Double digits year to date.

They've done a great job.

Specific focus by HR and operations teams.

Thanks, guys.

Our next question comes from Scott Ciccarelli, RBC.

Your line is open.

When is a little bit of the top down question, this is we have seen industry wide now, yourselves included that commercialist out perform the retail segment.

I understand it's an area that you can control where retail people are walking in or not walking in.

Is that a economic impact or are we starting to see a shift in the marketplace starting to take hold in terms of more people turning to the commercial side of the business?

We don't see any mayor shift between retail commercial from a overall sales performance basis.

Our sales performance, it hasn't changed that materially on what is going on on the retail side.

Some softness in the market.

Our take on that is that the retail customers are more influenced or impacted by the increase in gas prices and obviously, we talked about how much gas prices went up in the last quarter.

That putting the head wind out there.

We don't see anything material in the macro environment.

Cyclical or economic impact.

Our retail business is more mature than our commercial business.

We see incredibly bright prospects for the long-term in retail.

Where have a huge growth opportunity in commercial.

More of a housekeeping item.

Is there much of a difference between the mix between brand of product and private label?

In the commercial as opposed to the retail segment?

No.

At least not in our shop.

We don't carry different products.

We tried bringing in specific commercial brands, what we found was the customers would try them for a little while and realize the value proposition of our brands, Duralast and Duralast Gold primarily and they would switch over to them.

We don't have specific commercial brands.

There are a few categories where we made a decision that we think it's important to have a name brand in that category.

Those categories we have it but it doesn't change between retail and commercial.

Thanks a lot guys.

Thank you.

we have a question from Michael Baker, Deutsche Bank.

Your line is open.

Thanks, guys.

Real quick, some of your metrics like gross margin, EBITDA, they increased but maybe at a slower rate.

Is that a function of higher commodity prices?

Or is weak economy or just the increased commercial business and if it's the latter as commercial continues to grow more, should that impact our expectations for gross margin growth?

Probably a mix of some of those things overall.

We have done good things to improve the gross margin rates by lowering acquisition costs et cetera.

Clearly commodity prices have a impact on it as well.

To the extent that some of the prices can be carried on.

We had a 70 basis point improvement in gross margin in Q1 and Q2.

We expected to gross margin rates to moderate a little bit.

The quick answer is that is pretty much where we expected to be.

We are not surprised by where we are.

Is it where you expect to be on the SG&A as whole?

Flattish operating margins?

We did a good job this quarter at managing our expenses.

By 30 basis points.

Thanks a lot.

I would like to turn it back to Mr.

Rhodes for closing comments.

Before we conclude the call, I would like to take a moment to reiterate that we understand the opportunities we have for future growth and the challenges our customers face every day.

We cannot take anything for granted, as we understand we have to earn our customers business each and every day.

Again, I want to thank all our AutoZoners for their efforts and dedication to us achieving our goals.

We have a solid plan and a culture that is second to none.

This is a marathon and not a sprint.

Our focus is on our critical success factors 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.

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