汽車地帶 (AZO) 2009 Q1 法說會逐字稿

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 first quarter 2009 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 10:00 AM central time, 11:00 AM eastern time.

Before Mr.

Rhodes begins the company has requested that you listen to the following statement regarding forward looking statements.

Certain statements contained in this presentation are forward looking statements.

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

These are based on assumptions and assessments made by our management's line of experience, perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate.

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

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

Forward looking statements speak only as of the date made.

Except as required by applicable law, we undertake no obligation to update publicly any forward looking statements whether as a result of new information, future events or otherwise.

Actual results may materially differ from anticipated results.

Please refer to the risk factor section of AutoZone's form 10-K for the fiscal year ended August 30th, 2008 for more information related to those risks.

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

For reconciliation of these metrics please see AutoZone's 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 AutoZone's fiscal 2009 first quarter conference call.

With me today are Bill Giles, Executive Vice President and Chief Financial Officer of store development and IT; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

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

If not, the press release along with slides 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 all of our AutoZoners for their efforts that led to us achieving our 9th consecutive quarter of double digit EPS growth.

We are very pleased to continue to deliver double digit EPS growth in this challenging environment.

At the beginning of this quarter we held our annual national sales meeting here in Memphis.

The meeting's purpose was to recognize our 2008 successes and highlight our challenges and opportunities as well as review our key operating initiatives for 2009.

This meeting again reinforced the passion and commitment of our AutoZoners and clearly showed that our unique and powerful culture continues to flourish.

With over 2,000 AutoZoners in attendance, we launched our operating plan theme for 2009; great people providing great service.

Each year we create an annual theme that becomes the foundation for many of our key initiatives.

Establishing these tailored themes has proven to be successful in communicating many of our core strategies and bundling them into a message our entire organization can visualize and operationalize.

This year's theme great people providing great service concisely captures the essence of our culture.

Regardless of the challenges the macro environment presents to us, our customers, suppliers or other key constituents, we believe a team of great, highly motivated people delivering trustworthy advice and a compelling value proposition will lead to continued success.

To ensure we deliver on the promise implied in our 2009 operating plan theme, we will deploy enhanced training for our store AutoZoners, focus on selling the complete job, finalize the implementation of a new transaction process in our stores, focus on increasing ACE certifications and develop and deliver currently relevant and compelling marketing messages with specific emphasis on our value proposition.

Through these and many additional activities, we believe we will continue our multiyear improvement in customer satisfaction scores.

Simply put, we remain committed to the strategies we have developed over the last several years.

And although we are constantly making minor modifications to our operational strategies throughout any year, our key initiatives for 2009 are being implemented generally consistent with the plans we developed last spring and summer.

We believe we remain on the right course and that our long-term strategic plan will deliver continued success for many years to come.

In spite of a very challenging macro environment, we believe our industry remains much more resilient than most.

The two statistics we have highlighted as the key to our industry's performance are the number of vehicles on the road and specifically the number of seven year and older vehicles, or our kind of vehicles or OKVs, as we call them, and miles driven.

At this point the number of new vehicle sales have declined significantly while scrappage rates have not increased significantly.

This leads to an aging US fleet which historically has been beneficial to us and our industry.

On the other hand, miles driven have been down significantly this year, down 3.5% year to date through September following last year's decline of 0.6%.

However, we have seen a material decline in gas prices in the last few months and we are optimistic that over time the decline in gas prices will lead to a more normalized trend in miles driven, which could eliminate one of the major headwinds our industry has faced over the last couple years.

Regarding our sales results, at the beginning of the quarter, our sales in both retail and commercial were quite soft.

As you will recall two major hurricanes, Gustav and Ike, both made landfall in early September and following these storms there was some significant gas shortages in the Southeast.

Once September passed, our sales trends ran more consistent with our recent quarterly performance.

While sales were generally in line with past quarterly results, we continue to have significant opportunities to improve many facets of our business leading to improved sales performance.

In light of the current environment and recognizing the impact a negative 1.5% same stores sales performance had on our profitability, regardless of its drivers, we were pleased to report an increase in operating income over the prior year.

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

I'm very pleased to highlight that we continue to achieve very strong returns on invested capital, achieving 23.9%, up from 23.0% this time last year.

Finally, consistent with the plan we outlined a few months ago, we continued our share repurchases, moving closer to our new leverage ratios.

We believe purchasing our shares at these prices presents us with a real opportunity and it allows us to continue to leverage the power of our cash flow.

However, I think it is also important to note that we have been and continue to monitor the credit situation closely and will work to ensure that our company has the financial flexibility necessary to continue to prosper while maintaining our current credit ratings.

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, earning 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.

Turning to DIY, total domestic retail sales were up 0.7% for the quarter.

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

As we began our new fiscal year, we have continued to refine our product assortments, updating 14 of our 40 major merchandise categories this past quarter alone.

Refinement of our merchandise assortment is at the heart of what has driven AutoZone to its industry leading retail position and we remain committed to the timely execution of those updates.

We continue to see specific discretionary categories being negatively impacted this past quarter due to consumer cautiousness and the slowing economy.

However, several categories showed a great deal of resilience.

In fact, it is important to note in total we didn't experience any major shifts in performance between the sales floor and hard parts merchandise categories.

We highlight this because we are often asked if all of our sales floor categories are discretionary.

The answer is no.

Many sales floor items, like lighting, wiper blades, filtration, oil and chemicals are clearly nondiscretionary, although some of them can be considered deferrable.

Other sales floor categories like wash and wax and accessories are more discretionary and our performance in those categories has been more challenging.

It is also worth noting that while the economy continues to challenge our customers' pocketbooks, we have not seen wholesale shifts in sales mix to lower price point merchandise.

We have seen some shifts to lower price point products in select categories, but we have similarly seen shifts to our best merchandise in other categories as our customers continue to seek the optimum value point for their needs.

We have increased our focus on selling the complete job and refinements in this area have included improvements to our proprietary sales tool Znet; enhanced training and reporting and new promotions that provide our AutoZoners with another reason to educate our customers on the benefits of performing the complete job.

We continue to believe that our business is significantly less cyclical than most given that a large portion is need based demand.

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

However, we continue to mine our extensive array of data and specifically the data from our customer satisfaction surveys to identify ways we can further enhance the customer experience.

Last quarter we mentioned we were implementing new technology that would allow us to accept electronic payments at our parts counters.

This development was in direct response to customer feedback from our surveys.

This great new innovation eliminates the need for our customers to go through two different processes; parts look up and then check out.

The new process speeds up their tracks time while simultaneously making it much more efficient for our store teams.

We have just recently completed this implementation and we have been encouraged by the response we have received from customers and AutoZoners alike.

We are committed to continuing to look for new ways to improve the customer experience.

Lastly, our marketing messages, both in the stores and through our media initiatives have and will continue to be focused around value.

We believe we offer our customers a terrific value proposition and we will continue to highlight these offerings to our customers.

Now, let's turn to macro trends.

During the first quarter unleaded gas prices started out at $3.65 a gallon and began to decline materially in October.

In fact, October's prices fell from $3.48 to $2.66 per gallon.

By the end of the quarter the national average price of a gallon of unleaded was at $1.89 a gallon.

This reflects a 39% price decline from the same time last year.

While this has been very good news for our customers, we want to remind each of you of our historical experience.

Historically, our sales have responded quickly and negatively to significant increases in gas prices but we have not experienced the same corresponding lift in sales when we have seen a substantial decline in prices.

Clearly, however, this decrease at the pump has been a positive for our customers.

Regarding miles driven, we saw a decrease in July, August and September.

October and November data are not yet available.

But we believe miles driven should benefit from the easier comparison and obviously the lower gas prices noted previously.

Through August, miles driven have now decreased 10 straight months on a year-over-year basis, a decrease that hasn't been seen in many years.

While this has certainly caused a headwind to our business, let me again reiterate the two statistics we have 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.

While miles driven has presented a challenge, this has been somewhat offset by an increase in the number of seven year old and older vehicles on the road.

In fact, more now than ever in our country's history.

Weather is not something we can control.

However, this past quarter we did notice an impact mainly due to the disruptions from the hurricanes.

While a net negative this quarter, weather tends to even itself over time.

I would like to take a moment and comment on the situation with the three major US car manufacturers.

While the leaders of the major corporations work with the various key constituents to determine their future course, we have been evaluating the impact of the various courses on our business.

While forecasting and predicting future outcomes is inherently challenging and recognizing that it is extremely difficult to predict the potential impact on the US or global economy of these companies continuing to struggle financially, our evaluation has been centered on the more direct potential impacts to us.

Specifically, what would happen to our suppliers?

It is important to note that the majority of our vendors do not have significant exposures to the US OEMs.

And for those that do, we believe we have viable alternative suppliers.

In fact, we do business with multiple vendors today in many of our categories.

Additionally as mentioned earlier, the decline in new car sales will likely lead to an increasing age of the US car population.

I would also like to discuss the OEM subject a little differently, as we received a question, what if no one will provide financing to our vendors in the future?

Will you have to reduce our terms to help them survive?

First and foremost, we should answer the question by reiterating, we sell aftermarket auto products.

We don't do business with the tier one auto suppliers and we remain confident in our vendors abilities to find appropriate financing.

Now we cannot predict how banks will modify their lending habits in the future.

However, we remain confident in the health of our vendor base and in those situations where financial pressures could exist, it is our responsibility to have appropriate alternatives to supply those product lines.

We are happy to tell you as of today, we have not had to address these situations.

For the trailing four quarters sales per square foot were $238.

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

Okay.

Now, let's turn to commercial.

For the quarter, total commercial sales posted an increase of 1.8% versus last year's quarter.

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

We now have the commercial program in 2,240 stores supported by 141 hub stores.

During the quarter we opened two additional programs.

Our main focus remains on sales training and growing our business with our current program base through increased penetration of existing customers and acquisition of new customers in our service ratings.

We now have approximately 1,600 programs with the previously discussed additional resources.

While this subset of programs continued to outperform the results of our remaining programs, we experienced a slow down in the growth of these programs this past quarter as well.

Our results in our commercial business were clearly not up to our expectations this past quarter.

During 2008 our sales performance was consistently in the mid single digit range and this past quarter's results were certainly weaker.

We believe several factors contributed to our deteriorating sales performance during the quarter.

We've heard from many of our customers that they have experienced declines in their business specifically in the more deferrable categories.

Our sales performance in those categories has also been challenged.

While we were disappointed by this performance, it is important to note that we continue to believe in our long-term strategy.

As a result, we continue to focus on improving our hard parts assortment, specifically for late model application.

Leveraging our culture of customer satisfaction by providing prompt delivery of parts and products.

And we are working to enhance the skills of our commercial specialist, the key contact to our professional customers, as we are in the early stages of developing a world class direct sales force.

This year we have a specific effort to significantly enhance the utilization of our hub stores.

We are working to refine and enhance the product assortments in these locations while simultaneously working to improve the delivery frequency.

We've been testing these enhancements for over a year and have been pleased with the performance in a small set of hubs and their satellite stores.

We are now in the process of implementing these enhancements in a larger group of hubs.

We will monitor the performance, continue to refine the program, and if we see the results we expect, continue to expand to other markets.

Finally, we continue to see opportunities to leverage technology as a point of differentiation in this business.

In some respects at this point we are behind our competitors who have been in this business for many more years than we have.

However we are aggressively pursuing opportunities to effectively leverage technology now and into the future.

I want to take just a moment to share with you that just a couple of weeks ago I had the opportunity to attend our first annual sales leadership council recognition awards ceremony.

At this event we had the opportunity to recognize and reward the best of the best of our commercial sales team.

I must say, I was very impressed with the individuals, but I was equally impressed with their level of confidence in our program and our opportunities for the future.

Clearly these talented sales people have proven through their results that we can develop a terrific commercial business.

It is up to us to leverage their wisdom, continue to enhance our offerings and further develop the skills of our sales team across the organization to capitalize on the opportunities this business represents.

In summary, again we were disappointed with our slowing pace of sales growth this quarter.

However, we are in this business for the long run and at just over 1% market share, we have a tremendous opportunity.

Mexico.

Our Mexico stores continue to perform well.

We opened two new stores during the first quarter.

We currently have 150 stores in Mexico.

For the year, we expect our square footage growth percentage to be generally consistent with the previous years.

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

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

Thanks, Bill.

Regarding the first quarter for the 12 weeks ended November 22nd, we reported sales of $1.478 billion, an increase of 1.6% from last year's first quarter.

Same-store sales or sales for stores open more than one year were down 1.5% for the quarter.

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

Regarding our commercial business, our sales growth rate slowed but remained positive and we are encouraged by the progress we are making.

This marks our 6th consecutive quarter of positive sales growth.

We continue to be encouraged with our new field organization dedicated to growing our commercial business.

In addition we continue to enhance our training efforts for our commercial field leadership to grow sales.

In the first quarter gross profit as a percentage of sales was up 23 basis points versus last years quarter while operating expenses as a percentage of sales increased by 40 basis points.

This resulted in an operating margin of 16.1% down 17 basis points from last year's quarter.

Operating profit increased 0.5% versus the prior year.

Net income for the quarter was $131 million, a decrease of 0.9% and diluted earnings per share increase 10.1% to $2.23 from $2.02 in the year ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 23.9%.

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

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 our earnings per share.

We want to assure all investors we understand the capital we deploy in the business is your capital.

Based on our historic and current ability to generate strong cash flow, we are able to strategically invest in those assets we believe will generate an appropriate return.

Gross margin for the quarter was 50.1% of sales, up 23 basis points compared to last year's first quarter.

In the first quarter, margins continued to benefit from our ongoing category management initiatives.

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

This includes supply chain initiatives, tailoring merchandise mix, 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 all be it at reduced margin 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 34% of sales, up 40 basis points from last year.

Our deleverage came primarily from higher occupancy costs versus last year as well as self insurance expenses, which were higher versus last year.

Over the long-term we continue to believe we need approximately 1.5% to 2% same-store sales growth in order to leverage SG&A.

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

I'd be remiss if I didn't recognize our entire organization for their disciplined approach to managing our business during a very challenging macroeconomic time.

EBIT for the quarter was $239 million, up 1/2% over last year.

Interest expense for the quarter was $31.2 million compared with $28.1 million a year ago.

Debt outstanding at the end of the quarter was $2.268 billion or approximately $100 million more than last year's balance of $2.161 billion.

Our adjusted debt levels at 2.3 times EBIDTAR are higher than last quarter.

However, as we announced in a public filing at the end of June, we have re-set our leverage metrics to 2.5 times and expect to reach this level by the end of our second fiscal quarter of 2009 in February.

Maintaining our triple B, BAA2 credit rating during these difficult macro times is very important to AutoZone.

We continue to work closely with the rating agencies to provide transparency to our business model.

Simply put, we remain confident in both our business model and the health of our industry.

We purposely manage 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 36.6% and basically flat with last year.

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

Net income for the quarter of $131 million was down 0.9% versus the prior year.

Our diluted share count of 58.9 million was down approximately 10% from last year.

The combination of these factors drove earnings per share for the quarter to $2.23, up 10.1% over the prior year.

Related to the cash flow statement, in the first quarter we generated $136 million of operating cash flow and we repurchased $272 million of AutoZone stock.

At the end of the first quarter we have $337 million remaining under our share buy back authorization.

Next I would like 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 Q1 ending balance last year.

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

On a per store basis, we reported $513,000 up 1.3% over last year.

Also keep in mind, we have added additional parts coverage through our ongoing category updates implemented over the last year.

Accounts payable as a percent of gross inventory finished the quarter at 91.6% versus 89.9% versus last year's first quarter.

For the quarter, total working capital was a negative $66 million versus last year's balance of a slightly positive $467,000.

This decline in working capital was driven by a higher accounts payable versus last year.

Net fixed assets were up 3.6% versus last year and capital expenditures for the quarter totaled $51 million and reflect the additional expenditures required to open 34 new stores this quarter, maintenance on existing stores and work on development of our new stores for upcoming quarters.

Specifically related to new store openings, our new stores remain on track 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 absolutely believe that opening up stores during this more difficult economic time can be beneficial from a land procurement standpoint.

As our returns on invested capital indicate our stores provide very good returns and one method for utilizing the cash flow they generate will continue to be further development of our store base.

We opened 30 new stores in the quarter for a total of 4,122 stores in 48 states, the District of Columbia and Puerto Rico.

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

Depreciation totaled $40 million for the quarter only slightly 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 & Poor's is triple B and we have a commercial paper rating of A2.

Moody's investor service has assigned us a senior unsecured debt rating of BAA2 and a commercial paper rating of P2 and Fitch has assigned us a senior unsecured rating of triple B as well and a commercial paper rating of F2.

Now, I will turn it back to Bill Rhodes.

Thank you, Bill.

In summary, our business continued to perform generally consistent to previous quarters.

As we have often said, our business is primarily noncyclical.

We tend no to the experience very high or very low growth patterns.

We were pleased to have delivered another quarter of double digit EPS growth in light of our performance early in the quarter as noted previously.

As we have often highlighted, we believe our culture is one of our key points of difference.

I wish each of you could have attended our national sales meeting a couple of months ago.

The passion our AutoZoners exhibit for both our customers and our company is absolutely inspiring.

Their passion and dedication is what has built this company and made it what it is today.

July 4th, 2009 will mark the 30th anniversary of the opening of our first store in Forest City, Arkansas.

That first manager, [Doc Crane], set the pace for the passion for the customer that continues to be the cornerstone of our company today and for the future.

We owe a great deal to those who came before us and built this incredible business and this inspiring culture.

We are excited about what we can accomplish in 2009 and beyond.

We believe we can grow our business in 2009, no small feat in today's environment.

While it is great to be predictable, we are striving for improved performance, and we have confidence in our plans and are optimistic for our future.

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.

2009 for AutoZone is about great people providing great service.

Four main objectives for 2009 will be; one, a relentless focus on hiring, retaining and training our AutoZoners to make sure we are 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 effectively in 2009.

And four, commercial sales growth, appropriately paced, profitable growth across both our up and down the street and national account customers.

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

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

Our story remains consistent heading into our second quarter, 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 in retail, commercial Mexico and ALLDATA.

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

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 are committed to growing operating cash flow and 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.

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

Thank you.

(Operator Instructions) Our first question comes from Colin McGranahn, Bernstein.

Your line is open.

Good morning.

Thank you.

Two questions.

One, there has obviously been a lot of concern and focus on the credit environment.

And I was hoping you might be able to talk just a little bit about your factoring program and discussions you have had with the banks that participate in that program.

And how they are looking at the credit environment and extending credit to some of your smaller vendors.

Sure, let me jump in, Colin.

We obviously have had ongoing conversations with the banks that participate in the program.

And I will tell you on an overall basis, the capacity levels we see in the program are fairly consistent today as they were probably about a quarter ago.

Obviously, under the covers there is some movement with some banks pulling back and other banks increasing their position.

But on an overall basis, we have seen the level be relatively consistent.

You feel pretty comfortable that a 90% or so payables coverage ratio is achievable through the year?

As we sit here today, knowing what we know today, I would say yes.

We feel good about the program and our ability to keep the banks up to date.

We think it is a good program for them.

It is a profitable program for them.

And currently there is credit availability.

Okay, great, thank you.

And then secondly, on commercial sales, obviously the slow down in growth there was a little disappointing.

Was there anything you saw to see whether that came predominantly from larger customers, larger garages, smaller garages, more late model or older cars, geographic dispersion?

As you looked at that slower growth was there anything that stood out in terms of what was contributing to it?

Colin, first of all you said disappointed.

Obviously we are disappointed in the slowing of our sales growth in that business.

However, I want to make this point real clear.

We're not alarmed by it at all.

We are very comfortable we are on the right track.

We're going to have some ebbs and flows as we continue to grow this business and we're very optimistic about what the long-term commercial program can be for us and have a great deal of confidence in our team in that program.

There are a couple of things under the covers.

We have one national account that we are not doing the same level of business with.

They made a strategic decision to move in a different direction and that is providing us some headwinds.

There are also just some general things going on in that business where there are deferrable categories that are being deferred by our customers.

I wouldn't say there is anything we see different in later model versus older vehicles or in the different types of garages.

Okay.

And then quickly, final follow-up.

It looks like gasoline unit sales or gallon sales in the US might have been actually up in the last week or so.

Do you think that will portend that you can see some positive miles driven in late November or early December when you get that data?

Colin, I haven't seen that data yet.

Although, it doesn't terribly surprise me.

Think about it, we were paying $4 a gallon back in June and driving in this morning I saw $1.49.

Clearly, one of the things that is interesting about our customer base is there is a lot of carnage in the macroeconomic Wall Street environment.

Let's be honest, what happens on Wall Street has no bearing on what happens to our customers.

The change in gasoline prices is so much more significant to the vast majority of our customers.

And so you would think that if they are getting that kind of relief, it would not be unusual to expect that they would get some benefit and miles driven.

As we said in the prepared remarks, that miles driven can make a rebound and reduce that headwind that we have had for the last couple of years.

Okay.

Great.

Thank you.

Good look.

Our next question comes from Alan Rifkin, Merrill Lynch.

Your line is open.

Thank you.

A couple questions for Bill Rhodes.

Bill, if you look at your proportion of stores having a commercial entity, it is only about 54%.

And that is significantly lower than one of your main competitors is at in the mid '80s.

Are you of the belief that maybe through adding the commercial [desks] to additional stores that that could help build your program or do you believe that adding those incremental stores actually lowers your ROIC?

It is a great question, Alan, and one that we ask ourselves quite honestly, quite frequently.

Over the long term our expectation is that we could penetrate -- have a higher level of penetration of stores that are on the commercial program.

Our current focus is to get the program right in the stores that we have.

The fact that we would be servicing somebody else, other shops across town, is not going to have any bearing on our market position in the stores we currently have open, we don't believe.

We want to do is focus on the stores we have today that are on the program.

Yes, we will have minor increases as we move along, but not drastic increases as our current expectation.

We want to make sure we get the program right in the stores we have.

Over the long term, we certainly see opportunities to expand the percentage of stores that are on the program.

Okay.

Another, question, Bill, if you will.

I don't expect you to show your hand and tell us specific strategies but are you making special preparations in your California and in the former chief stores in preparation for O'Reilly coming in there full scale in 12 months?

Interesting question.

I think the answer starts with obviously we know what they're doing.

We also compete against O'Reilly's in a tremendous amount of our store base today.

So we know what they're like and how to compete against them.

Are we making some special efforts out there?

Absolutely.

We are making sure we are ready for them to come.

We are also looking for opportunities as they go through this transition.

Typically when transitions happen, they have their challenges and we want to make sure that we're prepared to take advantage of any challenges that do come about as a result of trying to convert a chain of stores like that.

So we are very mindful of what is going on out there and we will continue to watch it.

However, we are not making radical shifts in our strategy.

We operate our stores generally with one operating philosophy and that same operating philosophy will continue out there.

Okay.

And then Mr.

Giles, a question too if you don't mind.

Any impact at all from the calendar shift on your revenues?

And of the 14 of 40 merchandise categories that have been updated, have you seen any material benefit to those category comps so far?

On the first part of that question on the calendar shift, there was an impact certainly because of the shift in (inaudible) essence trading a week out of August for a week in November.

But it is difficult to quantify exactly and we will get the benefit back over the course of the year.

So one of the reasons we highlighted in both the press release and the script was that we thought that comparison was really looking at our post October business.

As we indicated that that returned to more consistent with our previous quarter.

Out of the category initiatives, yes, we do continue to see as we work through these categories initiatives and do category updates, we do see continued benefits which is why we are very focused on making sure that we get through every category at a minimum once a year.

And so for those categories that have been done, they continue to build some momentum.

Okay.

Thank you and congratulations.

We have a question from Gary Balter, Credit Suisse.

Your line is open.

Hi.

First of all, congratulations on another strong quarter, Bill and Bill.

Couple of simple questions.

One is, if we just take the 2.5 ratio you mentioned will be at the end of the second quarter and we applied it to what you reported for the first quarter, that would involve bordering about $360,000 more in debt.

You're currently authorized for $337,000.

So I'm assuming we will see some increase in that authorization to get there.

Recognizing Q2 numbers may be different than Q1 number.

But ultimately mathematically that works out to a $0.05 in the beginning of Q1.

Is that math --

Yes.

I think your math is pretty good.

We are going to do it.

As you get up to the [25], you don't have any concerns.

Colin had asked earlier about the bank program which is obviously so important to the way you guys do business in your dealings with your vendors.

That's all been run through the banks and everybody is comfortable with a higher leverage?

Well, certainly we have been fairly clear and public about the fact that we are moving through the 2.5 metric with the target of getting there by the end of Q2.

We've talked about that since June, and we've talked about it with a rating agency.

We are very big on transparency and I think we've been very clear as to where we're headed.

As Bill mentioned earlier in his comments, we're going to monitor closely the credit markets, the commercial paper markets and ensure we have adequate access to liquidity as we move through that process.

And a couple of business related issues.

The one market that O'Reilly I think is starting to do things based on their commentary has been Chicago.

Can you discuss what you have seen in the Chicago market in terms of pricing or anything more aggressive in marketing, etc.?

Is that looking different than other parts of the country right now?

Gary, if they are in the conversion process, obviously they are very early in that process, and to date we have not seen anything material one way or the other in their strategies or in our performance.

Okay.

Back to the other Bill, could you discuss the LIFO impact?

There's been some people concerned that we'll start to see deflation and that will have an impact on comps.

How do you think about that?

We take a look at it.

Obviously, we have had a bit of inflation over some period of time and it is likely that we will have some deflation as things cycle through.

As you know we don't run LIFO through the P&L on the balance sheet of around $215 million to $220 million.

There was a little movement this quarter.

We will continue to monitor it.

That obviously as I have said doesn't run through the P&L.

More importantly we will take a look at what impact deflation has on us on an ongoing basis, but I think it will be slow and not radical.

Okay.

And then the final question, I promise.

We talk a lot about miles driven.

We talk a lot about age of cars.

Right now we're going through a new phenomenon which is huge unemployment growth.

How do you factor that into the other two?

And obviously, it is not a positive but how much of a negative should we be thinking about it?

Gary, obviously, that's the one that we are very focused on today.

Obviously, we have seen unemployment move up from 4.5% to 6.7% or so in the last 12 months or so.

Let's look at it and say our business has not changed drastically.

However, if it moves to 8.5% or 9%, clearly that's going to put more pressure on a select group of our customers.

What we are going to do is we are going to make sure that we stay focused on providing them great value and being there for them when we need us.

So much of what we do -- or what they rely on us to do is need based demand.

And we want to make sure that we're ready for them.

We also want to make sure that whenever we come out of this economic cycle, that we are in a stronger position than we were when we came into it.

Thank you very much.

You have a question from Dan Wewer, Raymond James.

Your line is open.

Thanks.

Bill, you noted that the efforts to increase the utilization of our hub stores.

In the hub stores where this test has taken place, how much have you been able to increase the shipping frequency to the smaller nearby locations?

In the test that we ran, Dan, and again we started running it over a year ago.

We tested as we often do.

We go in with the small set of stores and we go in with the kitchen sink methodology.

We give them everything we can possibly dream of understanding that we were over resourcing those stores on a test to see and determine how high is high.

So, we over resourced those.

And there were stores that had six deliveries a day.

As we are rolling it out further, they have modified and slowed down some.

Many of them are in the three to four time per day deliveries.

Whereas store is not part of this program would be frequency of once per week, is that correct?

That's correct.

And are you seeing favorable sales response after you increase that shipping frequency?

Yes, obviously we have been pleased with the results and that's why we have expanded the program.

As we have expanded it, we have tried to optimize it better and take some of the cost out and make sure we find the optimal point.

And we'll be continuing to test it over the course of time.

The sales pickup, Bill, is that primarily in the "do it for me" segment or is it "do it yourself"?

It is both.

It's absolutely both.

I also have a question for Bill Giles.

I believe that you have been changing the accounting for the vendor co-op dollars and instead of allocating all of those dollars into cost of goods sold, you're now allocating some to SG&A.

How would that have impacted those two components?

That's a good question.

We have in certain cases identified individual expenses that we incur on behalf of the vendors in order to promote their product.

And so, in those cases we prefer to match up the vendor dollars that we receive.

So there is a little bit of shift between gross margin and SG&A.

But, it is not significant.

It is probably 10 or so points, maybe 15 points or so, but I would not say it's overly significant.

And then the last question I have on the drop in gasoline prices and how it may impact miles driven and eventually your sales performance.

Are you expecting to see a bigger lift on your do it yourself segment as opposed to commercial if that forecast is accurate?

I wouldn't necessarily think it's going to skew to one place or the other personally.

We will see over time what happens.

But I also want to remind you what we said in our prepared remarks was historically we have seen a much swifter reaction to gas price changes when they spike up.

Obviously, we haven't seen them spike down like they have in the last two or three months in a long time, if ever.

We don't necessarily know how quickly it will respond.

Typically, the response on the downside has been more muted.

Great.

Thank you.

Another question from Kate McShane, Citigroup.

Your line is open.

Hi.

Good morning.

I was wondering if you could comment on the regional strength in your store base.

Are you seeing any recovery in certain regions or any weakening in certain regions?

We typically try not to call out regional discrepancies.

We certainly see minor ones over time but, again, this quarter there is nothing worth highlighting on a material basis.

Okay.

And then I was wondering if you could comment on consumer credit?

Are you seeing any deterioration of consumer credit with your commercial customers or in retail?

I would say not necessarily.

We recognize that there is going to continue to be a little bit of a credit crunch both on a consumer standpoint as well as on a commercial standpoint and we have seen some businesses be a little more strapped on the commercial side of the business.

Overall, we haven't seen a material shift in the last quarter.

Are you still extending credit to those commercial businesses then or have terms changed as a result of the environment?

Every customer stands on their own and we evaluate each individual customer.

Currently, we continue to extend credit to commercial customers, yes.

Okay.

Thank you.

Thank you.

Question from Tony Cristello with BB&T.

Your line is open.

Good morning, gentlemen.

This is actually Allan [Hosmyer] in for Tony.

Good morning.

Good morning.

Just a follow-up on a previous question.

Did you notice a similar variance in sales volumes as the quarter progressed with trends peaking up towards the latter half outside of those areas that were significantly impacted from the hurricanes and related gasoline shortages?

Yes, I think our trends were drastically different in the back half based upon regional discrepancies.

We saw strength across the board.

Okay.

You mentioned the feedback on the rollout of your new electronic payment system has been very favorable.

Have you been able to quantify the impact that this may have had with some of your larger commercial customers either in terms of average ticket or buying frequency?

The electronic payment processing is solely on our DIY customers.

So it's only impacting the customers that are coming into our store and it just streamlines their transaction.

Yes, we have measured it over time.

We tested it probably starting about two years ago; a year and a half or two years ago.

And saw favorable performance in our sales performance over time, but also saw favorable performance in our customer survey responses.

And those were the drivers that allowed us to go ahead and roll it out to the rest of the chain.

Okay.

And last question, looking to the remainder of the year, has your outlook changed as a result of the significant closures seen in the dealer channels in the resulting eliminations and dealership bay capacity, and if so, how?

I don't think our outlook from that perspective has changed.

Obviously we are monitoring that situation and it will be interesting to see how it progresses over the next six months or so.

When you think about it, we have a one percent market share in commercial.

The macro will not going to determine our success in commercial.

Our execution in commercial is going to determine our success.

Thank you all very much.

All right.

Thank you.

And a question from Peter Benedict, Wachovia.

Your line is open.

Thanks.

A couple questions.

First, can you just talk about the pace of closings you are seeing among the independent part shops and the repair shops over the last few months?

Have you seen any uptick in that type of frequency, given the tougher economic environment?

We have.

We have certainly seen an uptick certainly versus anything we have seen in the prior quarters.

I couldn't quantify it for you specifically because I don't have those numbers handy.

But I would certainly tell you that we have felt an increase in that activity this past quarter, certainly compared to the previous two or three quarters.

Okay.

Thank you.

And then Bill, just on the October, November comp comment.

You said it was more consistent with the previous quarter.

Don't mean to kind of split hairs here but you guys did report a plus .6 in the fourth quarter.

Now that had some benefit from rebates.

So maybe on an adjusted basis it was down .4.

Qualitatively towards the upper end or lower end of that or just basically comps running flattish October, November?

Thanks.

If you look back over the last three years or so, our comps have been relatively flat.

So, I think you can take it from there.

Okay.

Great.

Thanks so much.

Our next question comes from Scot Ciccarelli, RBC.

Your line is open.

Hey, guys.

Bill, I was looking for a clarification on something.

I think you had said that the commercial business had a similar pattern as the retail business.

Did you mean in terms of softness in September and improving trends in October, November?

Exactly, Scot.

Okay.

And then you said there were some things that could have impacted the commercial.

Losing a big international account and losing some other things under the covers, I think was your phrase.

Do you think there was any kind of share shift?

Obviously, what we are seeing certainly on the public side in terms of big competitors out there.

You have one guy who is pushing very hard on commercial.

You have another guy who just bought a chain and expanding commercial programs into that chain.

Could that have impacted your business at all in your opinion?

I would tell you first of all, the fact that some of those other chains are growing their commercial business faster than we are at this point is not lost on us.

However, if you add up all of the key players in the commercial industry of the aftermarket group, we have such a minor share of the market today that there is plenty of room for us all to be successful.

Although it is interesting to watch what is going on with them, it is much more important that we continue to build our base operating plan and that we are committed to our long-term strategy and we optimize this incredible opportunity.

Okay.

Thanks.

The last question is obviously we have seen the big drop in energy prices.

Can you talk a little bit about what you expect the impact of that to have on the cost side of the equation, obviously both from a historic expenditure perspective but also on your distribution costs?

Yes.

I would think we obviously had a little bit of negative impact on fuel cost this quarter, but obviously as commodity based prices associated with fuel continue to come down, we would anticipate that being a positive from an expense standpoint both in CGS and maybe a little bit on SG&A as well.

As far as product costs are considered, I think that tail will be a little bit longer just as you move through a weighted average cost system.

Okay.

You have to wait for the turns to come through?

Yes.

You have a question from Matt Nemer, Thomas Weisel Partners.

Your line is open.

Hi, good morning, everyone.

My first question, I may have missed this, have you noticed any change in accounts receivable trends for commercial customers, and do you have any plans to change their payable terms given the credit crunch?

We don't have any -- we continue to monitor very closely the health of our individual commercial accounts.

We have seen, as I think Pete Benedict had asked earlier, whether we have seen a higher rate of individual account failures.

And we have seen people go out of business a little bit faster than we have in previous quarters.

But at the same time our terms are relatively short with commercial accounts in general.

So our exposure is not significant.

But, look, we continue to monitor it, we continue to extend credit and we are very cognizant of the fact that credit is tight out there and these particular accounts business may be a little bit softer.

Okay.

And then secondly, can you provide an update of what you are doing in the alternative parts category and have you seen any increased interest in recycled or salvaged parts among your customers?

First of all that is such a minor, minor part of our business.

Quite frankly, it is so minor that I couldn't even comment on what the trends are.

I certainly haven't heard anything of any significance.

Okay.

That's all I have got.

Thanks.

Thanks, Matt.

Our final question comes from John Lawrence, Morgan, Keegan.

Your line is open.

Good morning, guys.

Bill, would you comment?

One of the initiatives, the 14 categories and working through those, can you go into that just a little bit and talk about how much of that really has to with getting late model parts up as you complete that process?

Is it in all of those categories?

Is some of that heavy lifting already done?

And sort of walk through that if you will.

That's a great question, John.

Actually we are in our third year of this new process to add parts.

And also as we continue to grow our commercial business, we are getting deeper and deeper in the commercial side and we're seeing more and more demand on the commercial side.

We are constantly finding more opportunities to be more aggressive on late model products, but we also have to update our coverage because vehicle demographics in every store change over the course of every year.

And so to the extent that we're not keeping up with that change, we get in a weakened position.

Really, one of the things we are saying here is for the third year in a row, we are unbelievably committed to making sure that we update every category in every store in every year.

And that would include, obviously, whatever the private labels would fit in as you do those refinements.

No question about it.

Great.

Thanks, congratulations.

Thanks, John.

Before we conclude the call, I would like to take a moment to reiterate that our business model remains very solid.

Our customers continue to tell us we are improving on our efforts to meet or exceed their needs, and market share data confirms their opinions.

We have a solid plan for 2009 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 ever take our eye off of optimizing long-term shareholder value, we are confident AutoZone will continue to be incredibly successful.

And finally, I would like to wish our AutoZoners and everyone listening to this call this morning the best during the upcoming holiday season and a very prosperous and happy new year.

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.