汽車地帶 (AZO) 2008 Q4 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

Your lines have been placed on listen only until the question-and-answer session of the conference.

Please be advised today's call is being recorded.

If you have any objections please disconnect at this time.

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

Bill Rhodes, the Company's Chairman, President and CEO will 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.

Statements contained in this presentation are forward-looking statements.

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

These are based on assumptions and assessments made by our management in light of experience and perception of historical trends.

Current conditions expect a future development 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, credit markets, 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 of consumer -- transportation, construction delays, access to available vehicle financing and changes of laws or regulations.

Forward-looking statements are not guarantees of future performance, and actual results, developments, and businesses, may differ from these contemplated by such forward-looking statements and such events could materially and adversely affect our business.

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

We undertake to obligation to update, publicly, any forward-looking statements whether as a result of new information, future events or otherwise.

Actual results may materially differ from anticipated results.

Please refer to the risk factors section of AutoZones Form 10-K for the fiscal year ended August 25, 2007, for more information related to these risks.

In addition to the financial statements presented (inaudible) 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 AutoZones press release in the investor relations section at www.autozoneinc.com.

Mr.

Rhodes, you may now begin.

Good morning, and thank you for joining us today for AutoZones fiscal 2008, fourth 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 fourth quarter, I hope you've had an opportunity to read our press release and learn about the quarters results.

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

Please click on quarterly earnings conference calls to see them.

To begin, I'd like to thank our entire organization for the solid performance delivered this past quarter and for the year.

We were pleased to deliver our eighth consecutive quarter of double digit EPS growth particularly in light of a challenging macro environment.

We understand that in an environment where consumers are pressured, it is critically important to offer them a compelling value proposition.

Our AutoZoners continue to deliver a great value proposition to our customers through our terrific product offerings presented in a customer-friendly shopping environment, complimented with the most important element, trustworthy advice.

I must say I'm very proud of our AutoZoners across the organization.

This quarter was again about executing on our major initiatives outlined at the beginning of our fiscal year.

These initiatives have focused on improving our in store customer shopping experience, increasing our AutoZoners level of knowledge and accelerating commercial growth.

We haven't significantly changed our operating priorities or major initiatives in a few years because we are intensely focused on the basics, the basics that is our customers tell us are the most important.

As we close out fiscal 2008 and begin a new fiscal year, I would like to take a moment and highlight our full year accomplishments before reviewing the most recent quarters detail.

For the first time in our history our sales exceeded $6.5 billion while our same-store sales were up slightly at 0.4%.

Our industry had-leading operating margin expanded this year up 13 basis points and our earnings per share grew 18% year-over-year.

This growth was on top of an EPS increase last year of 13.6%.

As we remain intensely focused on improving profitability, we have also remained focused on making sure we achieve and acceptable return on the capital we invest.

I'm very pleased to highlight that we continue to build on our return on invested capital measurement achieving 24.0%, up from 22.7% last year.

We continue to see this metric as one of the best metrics for measuring our company's overall performance.

And finally, we are pleased to report that we generated over $900 million in operating cash flow this past year.

Over the last five years our operating cash flow has more than doubled.

A significant portion of this cash flow has been reinvested in our infrastructure, in existing stores and new store growth.

And we have continued to return our excess cash flow to shareholders through our on going share repurchase program.

Since it was first initiated in 1998 we have repurchased over 106 million shares or nearly $6.3 billion ending the year with 59.6 million shares outstanding.

All of these accomplishments are not small feat, especially in light of the current difficult economic environment.

All AutoZoners across North America, should be proud of our accomplishments this past year.

Let me summarize our operational performance for the year.

We completed for the second straight year, line reviews on all of our major merchandise categories and were able to introduce new, exciting products to the market like our exclusive ceramic brake pad line, Duralast Gold C-Max.

In total, we added approximately $180 million of new products this past year, the vast majority of which were hard parts.

This was on top of the major additions last year.

We are committed to making sure we have the parts and products our customers need.

We also continued our focus on placing our customers first through extensive training efforts.

We believe one of the most critical elements to building customer loyalty is providing trustworthy advice and having knowledgeable, well-trained, highly motivated AutoZoners.

This is how we deliver on our promise to put customers first.

On the new store front we opened 185 stores and relocated 14, expanding our presence in markets across North America.

Regarding commercial, we expanded the number of programs supported by our full compliment of resources and we redesigned our sales force and intensified our training efforts on our way to building a world class direct sales force.

And without a glitch, we opened our eighth domestic distribution center this summer in Hazleton, Pennsylvania, congratulations to everyone on our supply chains team, for a seemless opening.

And I would like to welcome all of our new AutoZoners who are providing great service out of our Hazleton distribution center.

Although much has been accomplished this past year I want to be clear that we were not satisfied with our sales performance.

We made progress that resulted in our third straight year of positive same-store sales and we enjoyed improving trends in our commercial sales performance.

But slightly positive same-store sales is not our goal.

And our entire team is not satisfied with this level of performance.

Starting tonight, we're kicking off our annual national sales meeting here in Memphis, with a focus and further rededication to service, salesmanship and leadership.

Our theme for fiscal 2009 will be, "Great people providing Great service." We want customers to notice a meaningful difference in our shopping experience versus what they can experience elsewhere.

I cannot wait to stand up before over 2,000 AutoZoners, lead our cheer and let them know what their efforts mean to this great organization.

We are confident that improving our execution across the organization will lead to sales growth now and for the foreseeable future.

We look forward to providing great customer service in 2009 and beyond.

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

We've continued to significantly enhance our parts offering in our stores.

While not a new discussion for us and on a per store basis managed quite effectively, 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 tool has allowed us to capture, more than before, lost sales information.

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

Over these two years, we've learned a lot and continue to further develop and enhance this process.

We've learned where many of our opportunities lie and where many of our excesses exist.

Last year we discussed the addition of significant additional inventory we felt was immediate low hanging fruit.

This year, as highlighted earlier, we finished the year adding even more products to our stores.

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

Additionally, we continued our focus on commercial sales training to develop a best in class commercial field sales organization.

We recognize that we are an organization that grew up with primarily a retail focus.

While we recognize that and are very proud of our many industry leading statistics, we know our future will be defined by our performance serving both strategic priorities, commercial and retail.

This will require continuous training in addition to adding experienced sales professionals to our team.

We're encouraged, but not satisfied, with the progress we are making on this important growth initiative.

For the agenda this morning I will review our DIY sales initiatives, commercial initiatives and Mexico.

Bill Giles will then provide more detail on our overall financial results, earnings performance and he'll provide an overview of both our balance sheet and cash flow statements for this past quarter.

Lastly I will provide a few closing comments.

Now, let's turn to DIY.

Total domestic retail sales were up 9.0% for the quarter, however, excluding the seventeenth week, sales were up 2.7%.

During the fourth quarter we continued to focus on driving sales and profits, through improving the customer shopping experience.

And we feel our store execution continues to improve.

During the quarter, as is customary, we experienced regional discrepancies in our sales performance, driven by many factors both positive and negative but nothing worth highlighting.

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

However, over time weather impacts tend to balance out.

While the economy continues to challenge our customers pocketbooks, we have not seen material shifts in sales mix to lower price point merchandise.

However, certain categories that are more discretionary in nature have shown some signs of weakness.

In and effort to compensate for this, we have increased our focus on selling the complete job to our customers as well as insuring we explain the benefits of our good, better, best product assortment, to offer the appropriate value proposition to every customer.

This is a key component of our training efforts.

Recently, several retailers discussed the impact they perceived they experienced from the stimulus checks.

It is very difficult for us to accurately quantify the impact of this infusion due the random nature of the disbursements.

However, we believe it had a positive impact on our business adding approximately 1% to our same-store sales performance for the quarter.

We did see a corresponding deceleration in sales once the check distribution had been completed, although, there were several other macro changes that occurred simultaneously, namely weather patterns.

However, we continue to believe that our business is relatively acyclical in nature, given that a large portion is demand driven.

Our business is much more inelastic than many and discounting products like starters and alternators simply do not drive impulse purchases.

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

Through our customer satisfaction surveys our customers continue to inform us that their overall customer service experience is improving but they also provide us with valuable insights on areas for further improvement.

In response to their feedback, we are implementing a new process to accept electronic payments at the parts counter.

This great new innovation eliminates the need for our customers to go through two different processes.

Parts look up and then check out.

This speeds up their transaction while simultaneously making it more efficient for our store teams.

We continue to look for new ways to improve the customer experience.

Regarding macro trends, during the fourth quarter, unleaded gas prices started out at $3.61 a gallon and went top $4.11 a gallon by mid July, prices then settled back down, to finish the quarter right about where they started, at $3.68.

Unfortunately, this represented a 34% increase over last year's quarter ending price of $2.75.

Obviously, 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 these 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 May and June.

July and August are not yet available.

Through June, miles driven have now decreased eight straight months on a year-over-year basis.

A decrease that hasn't been seen in many years.

While this has certainly caused a head wind to our business, let me again reiterate the two statistics we've always felt have 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 presented a challenge, this has been somewhat offset by an increase in the number of seven-year-old and older vehicles on the road by frankly more than ever in our countries history.

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

Overall, consumer price inflation in Q4 remained in low single digit range.

For the trailing four quarters, sales per square foot were $239.

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

Now, let's turn to commercial.

For the quarter, total commercial sales posted an increase of 11.3% versus last year's quarter adjusting for the seventeenth week, sales were up 5.7% versus last year's fourth quarter.

Coincidentally, our commercial business experienced sales distribution patterns similar to the patterns we experienced in our retail business.

We now have the commercial program in 2,236 stores supported by 138 hub stores.

During the quarter, we did not open many additional programs.

Our remaining focus this quarter was on sales training and development of our sales force especially considering we just completed the sales reorganization at the end of the previous quarter.

As mentioned on previous calls, there continues to be a subset of commercial programs, approximately 1,400 now, supported by additional resources.

While we do not quantify the difference in results between these groups of programs, we continue to be encouraged by the improvements we see as a result of adding these resources.

Overtime, we will continue to prudently expand the subset of commercial programs and increase the total number of overall programs.

We are pleased to report our 5.7% increase in sale during the 16 week period.

However, we expected even stronger performance.

As with any major new organizational change, it takes some time for the impacted AutoZoners to assimilate into the new structure and learn their new roles.

We certainly weren't immune from that phenomenon.

However we are confident that the new structure is the right structure for the future and it will pay dividends in the near future and beyond.

In summary, we had a good selling quarter for commercial, just not a great one.

As an additional development opportunity for commercial in 2009, we will enhance our technology platform and infrastructure to grow commercial well into the future.

In the near future we will be deploying new systems to our commercial programs to allow these AutoZoners to take advantage of the many futures and functionality embedded in our Z-net system.

We are developing many other technological enhancements focused on streamlining our commercial processes and improving our ability to provide great service to these important customers.

Again, while we are encouraged by our progress to date we have significant additional work to do before we reach our goal of developing a world class commercial sales force.

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

We remain focused on building this business for the long run.

We look forward to continuing to capitalize on the incredible opportunity this business represents.

Now, let's turn for a moment to Mexico.

Our Mexico stores continue to perform well.

We opened 18 new stores during the fourth quarter.

We currently have 148 stores in Mexico.

For the year, we opened 25 stores in Mexico and expect to continue our expansion for the foreseeable future.

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 the balance sheet.

Bill?

Thanks, Bill.

Regarding the fourth quarter for the seventeen weeks ended August 30, we reported sales of $2.211 billion, an increase of 10.4% from last year's fourth quarter.

Excluding the sales generated from the seventeenth week our total sales grew 4.1%.

Same-store sales or sales for stores open more than one year were up 0.6% for the quarter.

While our retail sales showed a modest acceleration, versus the previous quarter, our customer satisfaction surveys continue to confirm that we are improving the customers experience.

Regarding our commercial business, we continue to be encouraged by the progress we are making.

This marks our fifth consecutive quarter of positive sales growth.

It was just last quarter that we rolled out a new field organization dedicated to managing our future commercial efforts and a portion of the fourth quarter was spent transitioning these organizational changes into our company.

In the fourth quarter, gross profit as a percentage of sales up up 15 basis points versus last year's quarter.

While operating expenses, as a percentage of sales, increased by 18 basis points.

This resulted in an operating margin of 18.9% down three basis points from last year's quarter.

Operating profit increased 10.2% versus the prior year.

Net income for the quarter was $244 million an increase of 12.2% and diluted earnings per share increased 20.1% to $3.88 from $3.23 in the year ago quarter.

Exclude this years seventeenth week, operating margins were 18.7%, down approximately 20 basis points from last year's quarter.

Operating profit increased 3% versus the prior year, net income for the quarter was $228 million, an increase of 5% and diluted earnings per share increased 12.4% to $3.63 over the previous year's quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 24%.

This increase showed a slight improvement versus last quarter and a more material increase versus last year's fourth 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 and will continue to be fiscally prudent with our investments while optimizing our earnings per share.

Now, let me discuss gross profit and expenses in a little more detail.

Gross margin for the quarter was 50.3% of sales up 15 basis points compared to last year's fourth quarter.

In the fourth quarter, margins continued to benefit from our on going category management initiatives, however, higher fuel charges related to our supply chain and higher shrink expense had a negative effect.

Regarding our merchandising efforts, we continue to focus on insuring we offer the right products at the right prices to our customers.

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

Our Duralast, Duralast Gold and value craft product lines, continue to show sales increases in both our retail and commercial businesses.

Our customers continue to recognize the value proposition these high quality brands offer.

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

We do not manage to a targeted gross profit margin percentage as our key focus is on increasing absolute gross profit dollars.

SG&A for the quarter was 31.4% of sales up 18 basis points from last year.

However, adjusting for the seventeenth week in this year's quarter, operating expenses represented 31.6% of sales, up 35 basis points from last year.

Our deleverage came primarily from sales insurance costs and fuel charges associated with our commercial delivery business versus last year.

For the long run in order to leverage SG&A, we need approximately 1.5% to 2% same store sales growth.

We feel we are appropriately balancing our expenditures to improve the customer experience with being fiscally prudent.

I'd be remiss if I didn't recognize our entire organization for their disciplined approach to managing this business.

EBIT for the quarter was $417 million up 10.2% over last year.

Adjusting for the extra seventeenth week, EBIT was $390 million up 3% over last year.

Interest expense for the quarter was $34.8 million compared with $38.1 million a year ago.

Debt outstanding at the end of the quarter was $2.250 billion or approximately $315 million more than last year's balance of $1.936 billion.

The slightly counterintuitive decrease in interest expense with hight debt outstanding was driven by debt being lower than last year through most of the fourth quarter.

In fact, our average debt balance outstanding throughout the quarter, was $1.927 billion, compared to $2.036 billion last year.

Our debt increase in the last four weeks of our quarter, as we have two new public bond issuances, totaling $750 million.

Our adjusted debt level is 2.2 times are higher than last quarter, however, as we announced in a public filing at the end of June, we have reset our leverage metric to 2.5 times and expect to reach this level by the end of our second fiscal quarter of 2009 in February.

The agreement with our largest shareholder announced back in June addressed ESL's increasing ownership percentage due to AutoZone's on going share buy back program.

By all parties coming to agreement over limiting ESL's voting percentage, initially to 40% and then 37.5% following the December 2009 annual meeting and agreeing to increase our current debt metric from 2.1 times EBITDAR to 2.5 times, we feel we have mutually represented our equity holders and bond holders interest.

We've 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 approximately 36.2% basically flat with last year.

For 2009, we expect to run a rate of approximately 37%.

Net income for the quarter of $244 million was up 12.2% over the prior year, however adjusting for the extra week in this year's quarter, net income was up(Sic-see press release) $228 million up 5% over the prior year's quarter.

Our diluted share count of 62.9 million was down approximately 7% from last year.

The combination of these factors drove earnings per share for the quarter to $3.88 up 20.1% over the prior year.

Adjusting for the extra week in this year's quarter earnings per share were $3.63 up 12.4% over the prior year's quarter.

Relating to go the cash flow statement in the fourth quarter, we generated $411 million of operating cash flow and we repurchased $499 million of AutoZone stock.

Year-to-date, we repurchased $849 million as part of our stock repurchase program compared to approximately $762 million for the last fiscal year.

For the fourth quarter of this year, we reported, what we calculate as an auto parts aftermarket industry leading ROIC, or return on invested capital, of 24%.

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

We also finished the fourth quarter with a cash and cash equivalents balance of $242 million versus last year's balance of $87 million.

I want to point out a majority of this increase was attributable to our July $750 million public bond issuance.

While a majority of these funds went to pay down an existing commercial paper balance and pay off a retiring bond, also due in July, $162 million remained on our balance sheet at the end of the quarter.

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

We reported an inventory balance of $2.2 billion, up approximately 7% versus the Q4 ending balance last year.

This increase is primarily being driven by our new stores opened over the last year representing 4.4% more square footage than last year.

On a per store basis we reported $509,000 up 1.6% over last year.

Also keep in mind we have added additional parts coverage through our category line reviews.

Accounts payable as a percent of gross inventory finished the quarter at 95%.

Total working capital was $67 million versus last year's balance of negative $15 million.

If we subtract the $162 million in excess cash from our recent bond deal we'd have reported a negative $95 million in working capital.

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

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

Net fixed assets were up 5.1% versus last year, capital expenditures for the quarter totaled $90 million and reflect the additional expenditures required to open 84 new stores this quarter, maintenance on existing stores, work on development of new stores for up coming quarters and this summers smooth opening of our new eighth distribution center in Hazleton, Pennsylvania.

Congratulations and thank you to all of the AutoZoners who have contributed to this necessary facilities very efficient opening.

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

We opened 60 new stores in the quarter for a total of 4,092 stores and 48 states, the District of Columbia and Puerto Rico.

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

For a number of years we have held all discretionary expenditures to our 15% IRR hurdle rate.

During the summer we re-evaluated this decision and decided to implement a different hurdle rate for new stores and specific strategic markets.

Our revised new store hurdle will be a minimum blended rate of 14% annually.

It is important to note that all other discretionary expenditures will continue to adhere to our 15% hurdle rate.

Depreciation totaled $53 million for the quarter higher than last year due primarily 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 and Poor's is BBB and we have a commercial paper rating of A 2.

Moody's Investor Service has assigned us a senior unsecured debt credit rating of BAA 2 and a commercial paper rating of P 2.

Now, I will turn it over -- back to Bill Rhodes.

Thank you Bill.

In summary, we are please to have delivered another very solid year of performance.

We have a very dedicated team of AutoZoners who are committed to our success and are committed to delivering on our promise to put our customers first.

I would like to again thank our entire team across North America for their passion to our customers, each other, our communities and of course our success.

Together, we were again able to deliver another quarter of double digit earnings per share growth and, for the full year, we were able to deliver 15% earnings per share growth adjusting for the additional week in 2008.

However, we cannot be satisfied with these success.

We continue to have tremendous opportunities for improvement.

As I started the call mentioning, 2009 will be about improving our brand of differentiated customer service.

We have to make 2009 about great people providing great service.

Four major objectives for 2009 will be, one, a relentless focus on hiring, retaining and training our AutoZoners to make sure we're delivering trustworthy advice; two, continual refinement of our product assortment especially for late model products; three, deploying inventory more effectively across our network with specific emphasis on utilizing our hub network even more extensively in 2009; and four, commercial sales growth appropriately paced, profitable growth, across both our up and down the street business and national account business.

This will be accomplished through a combination of continual development of our sales team and refinement of our product assortment and service offering.

We enjoy industry leading metrics today but we have to continue to innovate and improve every facet of our business.

Regarding our commercial performance we have to earn our commercial -- our customers business.

We must do this through continual refinement and enhancement of our service offering and parts assortment while providing our customers with high quality products.

We also have to effectively tell our story.

We are in some respects the new kid on the block in this business and we have to convey our very compelling value proposition to our customers and in some respects, dispel the myths that others convey.

We have a robust program.

We just to flawlessly execute our plan and we will capitalize on the incredible opportunity this segment represents.

Our story will remain consistent heading into the new fiscal year a focus on steady, profitable sales and earnings improvement, refining our 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 need to accelerate our sales growth both commercial and retail.

Our market share is certainly small enough for us to grow all aspects of our business.

We understand our business, our success is built on doing the little things right to satisfy our customers We believe our stores look great and our AutoZoners have more and better tools at their disposal than ever before.

We continue to feel confident in our long range plans.

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

Customer service will continue to be our key point of differentiation and AutoZoners across the Company are committed to providing that "wow" customer service our patrons have grown to expect.

As we continue to demonstrate industry leading, financial metrics we remain cognizant of our investors capital, we continue to remain focused on optimizing long-term shareholder value.

I thank you today, for letting us share with you our companies results and touch on our on going initiatives.

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

Now, we would like to open up the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from the Rachel [Cho], Morgan Keegan, your line is open.

Yes, good morning, this is John Lawrence actually.

Congratulations, Bill.

Thank you, John.

Can you talk a little bit -- you've talked about expanding the inventories a little bit to later model.

Are you still seeing that same trend that the expansion in the commercial side is helping the retail stores as well?

Yes, no question about it.

As we continue to add products that is are particularly earlier in the life cycle, we continue to be impressed and encouraged by how many of those sales actually go to the retail business.

Now with approximately 85% of our sales in retail, that's one reasons that it's so deeply penetrated there but they're certainly helping on both sides of the business.

And then secondly, you mentioned a lot about -- on the commercial business, that systems will continue to play a part.

Is what's happening at all data with collision all a part of that?

And talk a little bit about all data and what they're doing.

Sure, well first of all we don't spend a lot of time talking about all data but Jeff [Logus] and his team continue to do an incredible job with that business.

We still struggle to find a tremendous link between being the shop owners advisor and linking that to driving higher parts sales.

However, as they enter the collision market, that gives us more information on the collision customers and gives us the opportunity to try to penetrate them more on the commercial side as well.

Great.

Thanks a lot.

Alright.

Thank you, John.

You have a question from Colin [MacGranahan], Bernstein, your line is open.

Thank you, good morning.

Two quick questions for you, first on the SG&A, if I am doing my math correctly and backing out the extra week, it looks like the dollar growth of SG&A accelerated a bit to maybe in the low [5%] range.

And I know you talked about self insurance and I think fuel, was there anything in the quarter that was more related to the reorganization of the commercial sales force, anything in there that would have been one time that might have led to that acceleration of dollar growth?

I wouldn't say really, Colin, that there was anything in there that related to a one time growth.

I mean, we continue to invest in the commercial business to make sure that we are supporting the customer experience that we want to there.

Clearly as you pointed out before, we certainly had some higher fuel costs, and some higher insurance costs as well that kind of jumped it up a little bit this quarter but we're going to continue to manage expenses and believe that we can control those going forward.

Okay.

And then secondly, in the commercial business can you talk about the performance, (inaudible) up, I think it is now about 1,400 stores that have the enhanced tools and processes, can you talk about the performance of that subset?

Yes, we don't -- as I mentioned in the prepared remarks, we don't break out those performance specifically but we continue to be pleased with the performance of those stores as we add the additional resources.

And thats why we continue to to add more and more stores to that list of programs.

Okay.

And then lastly, on the inflation, how much is that impacting your comps at this point?

You know, it is very difficult to break that out.

I mean, clearly there's inflation and a lot of commodity based products between oil and steel.

There's also a lot of technology enhancements in the products and as Bill mentioned in the earlier comments, we've added about $180 million worth of new products, many are technology, some are coverage.

So, it's hard for me to quantify specifically what the inflation is but there is some small benefit to inflation.

Okay.

Thanks, (inaudible).

Thank you, Colin.

Our next question comes from Dan [Waywer], Raymond James your line is open.

Thank you.

Bill, you noted you're reducing the return on capital hurdle rate from 15% I believe you said, down to 14%.

Should we interpret that as a signal that you're looking to maybe accelerate the unit growth rate in the future or rather does it reflect diminishing returns in the industry?

I think it really reflects -- I wouldn't say either of those necessarily.

I wouldn't say it's an acceleration of new store unit growth.

I think it's an opportunity for us to be more aggressive about getting into selected markets that previously may have been a little bit higher in cost.

And so, I think we want to look at the portfolio on a more blended basis and be able to balance it out.

We're still going to open a lot of stores at 15% or better and strategically we may take a few markets and maybe have a rate that's slightly below 15%.

Well, it looks like, I guess, what, the two regions were you're, perhaps under stored is Florida and Pacific Northwest, are those the higher cost markets you are alluding to?

Those would be two examples of higher markets, there are a couple of others as well, but yes, you can kind figure it out yourself but that's right.

And the other question I have, O'Reilly has given us a lot more information regarding their plans for CSK.

Based on what you have heard, what are the potential implications for AutoZone in your Western states?

Yes, Dan, I think the implications haven't changed for us.

I think we control our own destiny.

CSK was a good operator.

O'Reilly's is a very good operator, they certainly focus more on the commercial business.

But if you go back and look at the market share that we have in commercial today, it is so small that having a different competitor out there shouldn't be the determiner of our success.

I think our execution is going to determine our success.

So, we are certainly mindful of what they're doing.

We're going to watch it during the transitional period but we are sticking to our game plan.

They made reference to changing their pricing strategy, moving away from the use of coupons onto more competitive everyday pricing.

Will that impact AutoZone's pricing strategy in those states?

You know Dan, we've competed against O'Reillys and Advance and Pepboys, and CSK for many years, we understand how they operate with their pricing philosophies.

We believe we are going to use our pricing philosophies and methodologies as we go forward.

Okay, great.

Thank you.

Thank you.

We have a question from Allen Rifkin, Merrill Lynch, your line is open.

Yes, thank you very much.

Just a follow up to Dan's question, with respect to the lower hurdle rate for new stores, is that a function of anticipated lower revenues at new stores or do you believe it's a function more of escalating costs?

I would say it's probably more of latter, I don't think it's function of lower volumes whatsoever.

In fact possibly just the opposite in certain of those markets.

So, I think it's really a function of the costs and again, I don't want to overplay this.

We've dropped our hurdle rate from 15% to 14%.

So, I mean, we're still way ahead of our cost to capital.

Okay.

But if all your new stores, Bill, are meeting the 15%, why the decision now, to even lower the threshold?

Because, I think it allows us to be a little bit more aggressive in certain strategic markets, that, you know as Dan mentioned before, that we still have a lot of opportunity for us to continue to expand our footprint.

Yes, Allen, this is Bill as well.

I mean, there are simply some markets that we've been shut out of because of for all intents and purposes because of the cost of real estate.

And when we look at that and say, "Okay, we can get zero return out of the market or we can go in there and get a slightly smaller return that still significantly exceeds our cost of capital," we made the decision, let's go in there.

Okay.

And one follow up if I may.

Bill -- Bill Rhodes, you mentioned that in an effort to support the commercial program going forward in 2009 you'll be enhancing the technology platform, what associated costs should we we anticipate as a result of that initiative.

You won't notice any stair step changes in our cost platform because of that.

Okay.

Thank you very much.

Alright.

Thank you, Allen.

We have a question from Matthew Sadler, Goldman Sachs, your line is open.

Thanks a lot, good morning.

A couple of follow ups on the hurdle rate, you know, one would be, does this, at all, relate to your effort to drive more business towards commercial where the margins might be somewhat lower?

And then I'm also trying to reconcile what looks like obviously a modest lowering of the bar but a lowering nonetheless, for investment -- reinvestment into the operating business at a moment when you're trying to orient more of your cash flow to take (inaudible) leverage it seems like at this moment, if anything, you might want to conserve a bit more capital on the operating side until you achieve that goal.

Yes, I would break it down two ways, one is, I think, it's more a function of the cost as Bill mentioned before, the cost of real estate perse and the cost of operating in certain of those markets that we haven't really been able to penetrate up to this point.

So, I wouldn't look at it as a function of the operating model relative to commercial.

From an investment standpoint, again you are right, the credit markets continue to be tight and you know credit continues to be tight but at the same time, we have a high degree of confidence in our cash flow model.

And so when we look at long term over the long term, again you know, we generate a fair amount of cash this past year, this past quarter, and so we obviously don't give any guidance out into the future but we certainly remain very confident in our ability to maintain cash flow and we're going to continue to invest where we think it's appropriate and maintain adequate liquidity to execute our long term financial plan.

Got you.

And Matt, this is Bill as well.

I mean I want to re-enforce that our capital allocation strategy has always been, first, to take care of the infrastructure and existing stores that we have today, secondly, to open new stores and then third, to use that excess cash flow for share repurchases.

So, this continues to be in line with that strategy.

Second question, it looks like there was a different kind of impact from the extra week on DIY sales versus DIFM.

It's probably nitpicking a bit, but I am curious whether I'm misreading that or whether one benefited more than the other.

Matt, I'd be very careful to try to, as you said, nitpick the seventeenth week.

The reason there is a seventeenth week is because there's a calendar shift, and if you get into those weeks particularly you get closer to Labor Day or further away from Labor Day there can be material changes and material changes between retail and commercial.

So, I would be very careful to try to draw any conclusions from that week's sales.

Understood.

And then finally, how should we think about the way the redesigned commercial sales force impacts the business trajectory for the commercial business in Europe coming fiscal year but from a cost perspective and from a revenue perspective?

Well, the costs are all embedded in our model today.

Now, we will continue to grow the penetration of those stores but for the ones that are in the program today all of that cost has been in for some period of time.

As far as the sales performance, I think we were pretty clear in our prepared remarks that we are certainly happy to have positive sales growth for the first time -- or for five straight quarters, for the first time in a long time and had 5.7% for the quarter, but we're not satisfied with that.

And we believe we've got a lot of great AutoZoners in those new commercial sales positions, we're training them extensively.

And we've got to continue to got out and execute our plan.

And we certainly hope to gain benefits from that.

No that the install cost base is there presumably as the people have been hired, is it more of a paper performance model from here, so could that take some pressure off SG&A as we look into next year?

Well, I hope it will add pressure to SG&A for the performance but yes, it is more of a paper performance model.

It is not a full commission model by any stretch of the imagination.

Got you, thank you so much.

Thank you.

Our next question comes from Peter Bennedict, Wachovia, your line is open.

Thanks, hello guys, I was wondering could you discuss (inaudible) how the current credit environment is or could impact your ability to execute the buy back plans or any other part of your business vendor financing, purchases, that type of a thing?

Yes, at the moment we haven't seen an impact on any of those things.

I mean clearly we will continue to monitor credit availability which is really what you're asking and as you well know, the commercial paper market has been a little bit tighter.

We're not in the commercial paper market currently obviously with the cash balance, but again we believe we've got adequate access to capital.

We have $1 billion revolving credit facility and we continue to have available credit in our supplier (inaudible) receivable program as well.

So, we haven't seen any disruptions or changes up to this point and we're not anticipating any.

Okay, great.

And just on to the CapEx, Bill, a little bit higher than we had thought at least in this quarter.

Was that related to the DC or can you give us a sense of maybe what the capital spending plan may be for next year?

Yes, there's probably a little bit of the DC there and there's probably some [IP] projects as well.

But you know, overall our CapEx, you know, dollars spent was pretty much in line with where we expected it to be.

So, it might have been a little bit of timing but I don't see anything unusual there.

Okay, thanks.

And then lastly, just on the shrink being up in the quarter, can you talk to maybe about why you think that happened, could that have been related to the fact that the DC opened up in the quarter?

No, I don't think it was really a function of the DC, necessarily.

I mean, we saw a little bit of an increase in shrink and you know, we've got several tactics and a lot of people working very hard at reducing shrink.

So, you know, that's not something that we would look at on a permanent but if it is pop a little bit in the quarter and we thought it was worth mentioning.

Okay.

Fair enough.

Thanks.

Another question from Tony Cristello, BB&T, your line is open.

Thanks, good morning, gentlemen.

Morning.

Morning.

I'm wondering if you can maybe give us a little idea of how your commercial stores will -- or commercial presence in your stores will look?

Number of employees working the parts desk, number of regional sales people that you will have versus what you have now?

Just -- because it certainly sounds like you are definitely having a reorganization there, and I'm just trying to compare and contrast where we are today versus where we might be a year from now.

Tony, this is Bill Rhodes, too many Bills.

The in store allocation and sales force has not changed.

We do have the commercial specialists in these programs on an incentive compensation program but from there on, the volume drives the structure in the store.

Above the store we have what we call territory managers and we have approximately one for every ten stores that are on this program.

We have increased, over the last several months, our territory manager plans from 100 to 140.

So that's -- you can see that lines up with the 1,400.

And then we also changed the leadership or management structure above the territory managers.

And that was a material part of the shift, we got to more normalized levels of management ratios at those levels.

Is that one for each ten or is there a way I can sort of quantify that?

Well quantify.

We have approximately 20 today.

Okay.

And, you know, we also have an infrastructure in place that can support more territory managers without necessarily having to change that structure.

It's more of a geographically based structure today.

Okay.

And is that -- are they more responsible now for driving some of that incremental sales on the commercial side or is it still going be a sales presence at the local level and you sort of will feed it from there.

No, their responsibility is to drive sales.

They are a sales force and a sales management force.

That is their sole responsibility and they too, are on a incentive compensation program that has higher incentives than our base programs.

Okay.

And when you look at the parts availability, you've talked about parts availability having a definite impact.

Where, if you look at, I think 21,000 SKUs per store or so, how has that number fluctuated in terms of more hard parts or can you even, sort of, give us one way or, in terms of a direction that we might be seeing filter into the stores that is are giving them access to (inaudible)more parts?

You know, I don't really have those numbers at my fingertips during this discussion, but I don't believe it has changed materially.

The refinements continue to be a per store basis.

Finding what, you know, categories, what value propositions, we need to have in those specific stores.

And I'm very pleased with the progress that our merchandising team has made on, you know, better refining our inventory assortment on a per store basis.

Okay, and when you -- you'd noted -- excuse me, some of the more discretionary categories were -- you saw some -- experienced some sales shift to lower price points, would those continue to be the break categories and those types of things or are there some others more specifically you could point to?

You know I'd be careful.

We didn't say in those categories that they shifted down to their purchasing habits.

We said that in those categories, we saw softer trends.

So, it doesn't necessarily mean that they're trading down.

And, in fact in a lot of cases, we're seeing the opposite of that.

But some of the more discretionary and particularly I'd call them sales floor type categories, it's not all of the sales floor categories, but some of the sales floor categories are seeing some additional pressure.

Okay.

And one last point I wanted to just clarify, on the rebate check comment did you say that cost you 1 point in comp?

No, we said it added -- it is our estimate that it added 1% to comps in the quarter, but I want to be careful with this because it is incredibly hard.

We've tried very hard to estimate at that number.

But because of the random nature of the distribution of the checks it is very difficult to say what it meant and there were a lot of other changes as soon as those checks stopped that happened.

Mainly it was very cool in August across the country.

So, its not the difference of positive 0.6 to negative 0.6, simply explained by rebate checks?

I wouldn't say entirely but basically what we are trying to convey to you is that we think it was about 1 point benefit in the quarter.

As Bill said, it's difficult to empirically quantify that, but that's kind of our best guess based on what we've seen.

Okay.

Great.

Thanks, guys.

Alright.

Thank you.

We have a question from Steven Sonnek, Friedman, Billings, Ramsey, your line is open.

Hi, thanks.

Just a follow up clarification question, I think on the, you know, the comps and the stimulus benefit and I understand it's tough to quantify, but I guess maybe the better way to ask it or maybe a better answer or that would help us is, I guess what I am inferring is that the, you know, the comp run rate that you're trending at right now would probably be a level, 100 basis points lower than what you reported for the quarter.

Am I understanding that correctly, so you're probably at a run rate just south of flat right now like say negative 0.4 of a percent comp?

Yes, I wouldn't articulate it as a run rate.

But, if you said what did we experience in that quarter?

Yes, if we took our estimate as fact, then we would run a negative 0.4.

But there's a lot of other factor that go into any individual one quarter.

And I would just caution you not to try to draw too much from that one conclusion just look back over the last three years and our comps have been trading in a pretty tight band over that period of time, which says with all of the pluses and minuses we haven't seen any material change.

Okay.

And, I mean, you're not too far into the current period, but is it -- the trend kind of pretty consistent?

Yes, we have a very consistent methodology of not commenting on the period quarter to date because it's such a short period of time, and there's a lot of things that can happen in a short period of time that can send signals that may or may not turn out to be true.

Okay,that's fair.

And second thing, if I could, you know, maybe even for Bill Giles, but this is the second consecutive quarter where your total operating margins have slowed in terms of expansion whereas last quarter I think they were up a couple of basis points and this quarter actually extra week margins were down a little bit and given the numbers that you highlight what you need to leverage and then your comments you know, you may see gross profit margin expansion slow a little going forward.

Is it -- should we think about maybe, you know, operating profit margins possibly contracting a little bit from where they are now as we look out over the next 12 to 24 months?

Yes, I mean obviously you've hit on all of the buttons.

I mean you've got to come to a conclusion as to where you think same store sales are going to trend et cetera.

We do believe there's opportunity for us to continue to move and improve gross margin, we've put a lot of energy and effort behind that to category management efforts and create imports lowering costs, product acquisition costs et cetera.

SG&A, as you mentioned, was impacted this quarter by higher self insurance costs, higher fuel costs, et cetera, there are actions that we can take to try to control those costs going forward.

But we do expect that there would probably be a little of deleverage from SG&A and again you just kind of have to do your model out to see where it shares out.

Okay.

And last, if I could, just, what percentage of the new stores might be in this kind of 14% hurdle rate range you know versus the 15%?

I mean, it sounds like we're talking about a small amount but can you give us a sense if you open another 116 next year, what number will be in the more of the 14% hurdle rate range?

Yes, it would be hard for me to quantify, exactly.

Obviously, we have our own internal targets, et cetera but it's going to be a function of what's available and how we approach it but you know, more importantly we are going to manage through a 14%, we're going to give ourselves the latitude to enter some of these strategic markets that previously we had not gotten into.

And so, but again we know we continue to manage the portfolio to 14% number.

Okay.

Thanks, Bill.

Thank, Steve.

We have a question from David Cumberland, Robert Baird, your line it open.

Your line is open.

Good morning, thanks.

My question is on the new process to accept electronic payment at the parts counter.

Is that fully implemented across the stores?

Yes, it's not at this point in time, I believe it was in, something like, 1,600 stores at the end of the quarter, but is on a very fast track to be in all of the stores.

And this is something we're really excited about.

I mean, one of the things that our customers have said to us is they do not like having to go will you two different processes but it's a very complex issue to go out and make that many cash drawers -- it -- you know, we're very focused on controls and having cash in a lot of different places is not something that's very enticing to us.

So, the fact we've actually moved all of the electronic payments so they can be accepted at the parts counter not only eliminates that, it eliminates them having to go through two processes and it improves our controls.

So, we're pretty excited about this.

This is one, quite frankly, we've been working on for about ten years to figure out how to do it and it's now become a reality.

Bill, when might that be in place across the stores?

I think it will be finished by the end of the first quarter or so.

Yes, we'll have it pretty much in all of the stores by the end of the first quarter.

And so far it's been received very well.

Sounds great.

Thank you.

Thank you.

Okay.

Thank you all.

Before we conclude the call I'd like to take a moment to reiterate that we are excited about our growth prospects for the upcoming year.

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

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

But I want to stress that 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.

That does conclude today's conference.

Thank you for participating.

You may disconnect at this time.