汽車地帶 (AZO) 2009 Q2 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

(Operator Instructions) Please be advised today's call is being recorded.

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

Mr.

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

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

Central Time, 11:00 a.m.

Eastern Time.

Before Mr.

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

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

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

These are based on assumptions and assessments made by our management in light of experience and perception 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 of our suppliers, energy prices or in the prospect of war, including terrorist activity, availability of consumer transportation, construction delays, access to available and feasible financing and changes in laws or regulations.

Forward-looking statements are not guarantees of future performance and actual results, developments, 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 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 factors section of AutoZone's Form 10-K for the fiscal year ended August 30, 2008, for more information related to those risks.

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

For a reconciliation of these metrics, please see AutoZone's press release at 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 quarter 2009 second quarter conference call.

With me 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 second quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results.

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

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

To begin, I'd like to thank all of our AutoZoners for their efforts that led to us achieving our 10th consecutive quarter of double digit EPS growth.

For the quarter, we experienced significant growth with same-store sales increasing 6%, our strongest performance since 2002.

And EPS increasing 21%, our best performance since the second quarter of fiscal 2005.

As we have indicated in the past, we believe our business is not inherently cyclical in nature.

And given the difficult macro environment and continued challenges facing our customers, we believe we are very well positioned to continue to provide great value and trustworthy advice to assist our customers, both DIY and DIFM, in their efforts to save money during these difficult times.

We believe there are several factors that are positively impacting our industry, specifically, lower gas prices and increasing vehicle age.

At the same time, our industry is faced with headwinds, like declining miles driven.

However, we can't control any of these macro issues and therefore, we remain focused on the things we can control.

Specifically, we remain committed to hiring the best potential AutoZoners.

We believe the current challenges in the economy provide us with a unique opportunity to hire additional, very talented future AutoZoners.

And our team is vigorously pursuing this opportunity.

We also remain committed to retaining and training our AutoZoners to make sure we continue to deliver the trustworthy advice our customers have come to expect from us.

Additionally, we continue to refine and expand our product assortment and we have accelerated our rollout of our enhanced hub store model.

Finally, we continue to grow our commercial business and continue to grow it profitably.

We remained intensely focused on these objectives this past quarter.

We are very pleased with our result this is quarter and I would like to thank and congratulate our over 55,000 plus AutoZoners across North America for their terrific performance.

As our performance clearly accelerated this quarter, we will attempt to address several items that we believe will be on the minds of many listeners this morning.

As I mentioned, for the quarter, we had our best same-store sales growth since 2002.

We were pleased with the performance in all aspects of our business but it's worth highlighting our retail sales performance, which accelerated significantly.

Over the years, many have questioned the future growth prospects of the retail business in this industry.

We have remained steadfast in our belief that the retail business is strong and will remain strong.

Over the course of the last several years, we have continued to refine and enhance our service, product offerings, marketing and many other aspects of this business.

This quarter, we benefited from our AutoZoners' efforts to improve the customer experience.

While we agree that the potential for growth in the commercial business is great; and by the way, our commercial business experienced its seventh consecutive quarter of sales growth; we remain committed to providing great service to all of our customers, regardless of how they interact with us.

We have spent a tremendous amount of time this quarter studying the reasons for the acceleration in our business since the first quarter.

As we have often stated, gas prices have an inverse correlation to our sales performance and gas prices were down significantly since this time last year.

Additionally, there has been a substantial reduction in new car sales.

We also had a benefit from a calendar shift caused by our 53rd week last year.

However, we also believe we are very well positioned to meet or exceed our customers' needs and capitalize on the significant change we experienced in customer traffic flow.

Conversely, while miles driven continued to show negative trends, 14 straight months of comparable declines through December now, our results showed that other micro and macro factors were more impactful to our sales results.

Lastly, we feel our business may be benefiting from the general slowdown in the economy.

We believe more people are focusing on maintaining their cars due to the economic climate.

During the quarter, we experienced improvements in our sales across a wide variety of merchandise categories.

And those improvements were experienced across a wide variety of geographies.

Before proceeding to our normal quarterly detailed discussions, we want to address the question of whether or not we can sustain this level of performance.

As we have stated before, we don't give forward-looking guidance.

One reason we have this philosophy is we don't know what the future will hold.

In fact, we wouldn't have predicted the level of acceleration we experienced this quarter.

Historically, for the last three years, our sales have fluctuated in a pretty tight pattern, with this quarter being the anomaly.

Rather than attempting to predict the future, our efforts are and will continue to be on maximizing our potential and being prepared to react to our customers' needs.

I believe our AutoZoners did an excellent job of this during the second quarter and I'm confident they are well prepared for the future.

Finally, as our string of 10 consecutive quarters of double-digit growth in EPS suggest, our business model is very resilient to a range of economic environments, both good and bad.

The bottom line is, we are quite optimistic about our prospects for the next quarter, the balance of the year and beyond.

I'll take a few moments now and talk about our retail commercial and Mexico results.

And then Bill Giles will review our gross margin results, operating expense results, balance sheet and cash flows.

Let's turn to DIY.

For the quarter, total domestic retail sales increased 8.9%.

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

This quarter, we updated 11 of our 40 major merchandise categories.

These 11 category updates were split evenly between hard parts and sales floor updates.

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

We continued 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's important to note that 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're often asked if all of our sales floor categories are discretionary.

The answer is simply, no.

Many sales floor items, like lighting, wiper blades, filtration, oil and chemicals are clearly non-discretionary, although some of them can be considered to be deferable.

Other sales floor categories, like wash and wax and accessories are more discretionary and our performance in those categories didn't benefit as much.

It's also worth noting that while the economy continues to challenge our customers' pocket books, we have not seen material 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, Z-net, 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 demand-driven.

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

However, we continue to mind 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 electronics payments at our parts counters.

Historically, all sales transactions needed to be completed at the cash register.

Now customers choosing to pay with credit or debit can execute their complete transaction at the parts counter.

We believe this has improved the customer shopping experience and at the same time, we have seen an increase in our credit and debit transactions.

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

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

Tying all of the previously mentioned themes together this morning, we're excited to report that the industry sales data available to us has shown we're gaining share across many merchandise categories in our space.

Now, let's turn to some of the macro trends.

During the second quarter, unleaded gas prices started out at $1.89 and declined to around $1.60 per gallon before returning to close to $2 by mid-February.

We believe these price declines had an impact on our customers' behavior about driving and maintaining their cars.

Over the last six months, gas prices have declined materially from the $4 per gallon level.

And this change has manifested into a substantial quasi-stimulus to the economy.

With approximately 10 billion gallons of unleaded gas consumed each month across this country, each $1 decrease at the pump contributes $10 billion in additional spending capacity to our customers.

Regarding miles driven.

We saw a decrease in miles driven in October, November and December, with December's trend definitely less negative.

January and February data is not yet available but we believe miles driven should ultimately benefit from the easier comparisons and obviously, the lower gas prices previously noted.

Through December, miles driven have now decreased 14 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've always felt have the closest correlation to our market's growth, miles driven and the number of seven-year-old and older vehicles on the road.

While 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.

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

We believe weather did not have a material impact on our results this past quarter.

We'd also like to address the impact the credit markets are or could have on our vendor base.

Thus far, fortunately, we have not experienced any disruptions to our supply chain as a result of the economic downturn.

In fact, we launched an initiative to perform extensive analysis on the health of our vendor base starting last fall.

We closely reviewed both their financial health and AutoZone's direct exposure to each of these vendors.

While we were pleased with the out come of the analysis, it highlighted some areas of increased exposure and our merchandising team is actively addressing those concerns.

As a result of this initiative, we have developed an ongoing process to continually evaluate our exposure.

Our vendors remain able to borrow effectively under our supplier-confirmed receivables program.

And we have not experienced any product disruptions from our suppliers who additionally service OE manufacturers.

I'd like to stop here for just a moment and thank our vendors for helping us meet the needs of our customers.

Their support and will continue to be invaluable to our success.

For the trailing four quarters, sales per square foot were $240.

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

Now, let's turn to commercial.

For the quarter, total commercial sales increased 4.3% versus last year, which represents an increase in trend versus the previous quarter's sales result.

We continue to work hard to accelerate our rate of growth in commercial.

This quarter represents the seventh consecutive quarter of positive comps in our commercial business.

It is important to note, included in the year over year comparison, is a significant headwind due to the loss of business with one customer.

While we were disappointed to lose a substantial portion of this customer's business, our relationship with them was nontraditional, with the majority of their purchases being parts and products that were outside of our supply chain.

Because these sales didn't leverage our supply chain, it was difficult to provide a differentiated value proposition.

The loss of this business has reinforced the importance of our currently strategy to pursue businesses that leverage our strengths of great service, exceptional product assortment and high quality products.

For the quarter, excluding this customer, our sales increased by 9%.

We continue to be encouraged by our results, as we continue to see substantial future sales and profit growth opportunities.

We have our commercial program in 2,252 stores, supported by 143 hub stores.

During the quarter, we opened 12 additional programs.

Our primary focus remains on building and developing our sales force.

We are focused on profitable sales growth tactics that drive customer acquisition, share of wallet growth and retention.

We operated approximately 1,600 programs, we've previously discussed as having additional resources.

This subset of programs continues to outperform the results of our remaining programs.

The majority of our business is derived from up and down the street accounts, which experienced steady growth throughout the quarter.

National accounts remain a very vital segment of customers.

And excluding the previously discussed customer, our sales with national accounts grew nicely during the quarter.

We also continued to develop our public sector business and have experienced substantial growth over the previous year in this customer segment.

During the third quarter of last year, we restructured our field sales force to improve our sales focus and effectiveness.

Additionally, over the course of the last year, we increased the size of our field sales organization and invested substantial resources in the training and development of these very important AutoZoners.

This team continues to improve and is an integral part of our commercial part of our growth strategy.

We continue on our journey of developing a world-class sales force, which can clearly articulate AutoZone's value proposition to our professional customers.

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

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

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

During the quarter, we implemented our plan to significantly expand this program.

And as a result, experienced some onetime cost associated with the implementation.

As we are encouraged by our results, we will continue to evaluate and refine the program.

And we expect to continue to further expand to other markets.

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

We believe we have opportunities to further integrate our Z-net systems with our commercial systems to offer seamless processing for all commercial AutoZoners.

While this effort will be ongoing, we believe it is just one more example of leveraging our strengths and assets to enhance our offering and grow our commercial business.

In summary, we believe we are constantly enhancing our offering in this business.

And as a result, we believe we can build on this momentum heading into this third quarter.

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

Let's talk about Mexico.

Our Mexico stores continued to perform well.

We opened eight new stores during the second quarter.

We currently have 158 stores in Mexico.

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

Over the last several months, we have experienced a significant challenge in this business, as the peso has depreciated relative to the US dollar, rather materially, on a quarter over quarter basis.

At the end of the quarter, the exchange rate was at approximately 14.5 pesos to $1.

This is up from approximately 10.5 pesos to $1 just a year ago.

This exchange difference has put pressure on the US dollar earnings comparisons, in fact, making the comparison in operating profit very challenging.

We believe we have an appropriate strategy to manage our Mexico business for the long run, while minimizing foreign currency risk.

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 balance sheet.

Bill?

Thanks, Bill.

Regarding the second quarter, for the 12 weeks ended February 14, we reported sales of $1.447 billion dollars, an increase of 8.1% from last year's second quarter.

Same-store sales or sales for stores opened more than one year were up 6% for the quarter.

As Bill has previously mentioned, this growth was the largest same-store improvement for us since the fourth quarter of fiscal 2002.

Traditionally, the second quarter is our lowest volume quarter and it is important to note, that this quarter can be a bit volatile from a sales and earnings perspective due to the lower volumes, holiday shifts and weather patterns.

In the second quarter, gross profit, as a percentage of sales, was down 18 basis point versus last year's quarter.

While operating expenses, as a percentage of sales, decreased by 31 basis points.

This resulted in an operating margin of 14.8%, up 13 basis points from last year's quarter.

Operating profit increased 9% versus the prior year.

Net income for the quarter was $116 million, an increase of 8.6%.

And diluted earnings per share increased 21.1% to $2.03, from $1.67 in the year-ago quarter.

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

We're proud to report that this metric improved over the second quarter of 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 that 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 49.7% of sales, down 18 basis points compared to last year's second quarter.

In the second, margins declined due to unfavorable shrink expense of approximately 30 basis points versus last year.

We believe this higher run rate is directly correlated to the challenging economic times.

And as a result, we've instituted only key initiatives to reduce exposure on a go-forward basis.

We feel these initiatives can reduce the rate in the future.

While we believe our shrink percentage is in line with industry averages, we must and we will improve from these recent trends.

Helping to offset shrink expense, we were able to enjoy lower distribution cost, as a percentage of sales, due to improved efficiencies and lower fuel cost.

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

And as we've said previously, we have not seen a material shift down to our good categories from our better and best categories, as the economy has weakened.

Our Duralast, Duralast Gold and Valucraft product lines continued to show sales increases, in both our retail and commercial businesses.

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

Looking forward, we believe there continues to be opportunity for gross margin expansion.

We do not manage 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 34.9% of sales, down 31 basis points from last year.

Our leverage came primarily from higher sales volumes.

However, offsetting some of this leverage, we purposefully invested in an accelerated hub store rollout, which was really all about shifting more product to the right place across our local markets.

This expense was payroll related in order to set the stores appropriately for the new product assortment.

In addition, our medical expenses were higher versus last year.

This trend has remained intact now for over a year.

We believe we might seeing the light at the end of the tunnel in this area, as we've been monitoring it very closely.

Historically, we have experienced a low loss rate regarding our self insurance exposure.

Only in the past year, have the claims materially changed.

We are being extremely diligent to reduce this exposure going forward.

Lastly, we experienced higher legal fees for the quarter.

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 this business very well and appropriately capitalizing on our accelerated sales performance.

EBIT for the quarter was $215 million, up 9% over last year.

Interest expense for the quarter was $31.9 million, compared with $28.6 million a year ago.

Debt outstanding at the end of the quarter was $2.691 Billion, or approximately $600 million more than last year's balance of $2.095 billion.

Our adjusted debt levels, at 2.5 times EBITDAR, are higher than last quarter.

However, as we announced in a public filing at the end of June, we have reset our leverage metric of 2.5 times and expect it to reach this level by the end of this second fiscal quarter of 2009.

While we expect to maintain this 2.5 times target, maintaining our BBB, Baa2 credit rating is the primary driver behind our targeted credit measure.

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 purposefully manage our capital structure, relative to our cash flow, in order to maintain our credit ratings and investment grade, while optimizing our cost of capital.

For the quarter, our tax rate was approximately 36.6%, 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 $116 million, was up 8.6% versus the prior year.

Our diluted share count of 57.2 million was down approximately 10% from last year.

A combination of these factors drove earnings per share for the quarter to $2.03, up 21.1% over the prior year.

Relating to the cash flow statement.

In the second quarter, we generated approximately $8 million of operating cash flow.

This number is considerably lower than the second quarter of last year due to two key items.

One, income taxes payable was lower by approximately $70 million versus last year due the timing of our estimated payment occurring in this quarter this year versus in Q3 of last year.

Secondly, we discontinued the factoring of our commercial accounts receivable with a third-party bank.

While this decision permanently increases working capital, having approximately a $55 million negative impact, we believe it helps to ultimately add capacity to AutoZone's overall credit capacity.

It is important to point out that the collectability of these accounts receivable balances remain strong, as our writeoffs were no higher this year compared to last year.

While we could securitize these bundles in the future in order to continue to sell them to banks, we do not believe that it made economic sense to do so.

Again, while this quarter's cash flow was down versus last year's Q2, we believe we have the ability to grow operating cash flow on a full-year basis.

We repurchased $375 million of AutoZone's stock during the quarter.

And at the end of the second quarter, we had $462 million remaining under our share buyback authorization.

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

We recorded an inventory balance of $2.2 billion, up 5.9% versus the Q2 ending balance last year.

This increase is primarily being driven by our new stores opened over the last year, as on a per-store basis, inventory was up 1.4% at $511,000.

Accounts payable, as a percent of gross inventory, finished the quarter at 90.2% versus 89.1% versus last year's second quarter.

For the quarter, total working capital was up $81 million versus last year's balance of $31 million.

This increase in working capital was due to the previously discussed AR facility brought back on the balance sheet and the difference in income taxes payable.

Net fixed assets were up 2.9% versus last year.

Capital expenditures for the quarter totaled $47 million and reflect the additional expenditures required to open 28 new stores this quarter, maintenance on existing stores and work on development of new stores for upcoming quarters.

Specifically related to the 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 believe opening stores during this more difficult economic time can be beneficial over the long-term.

As our returns in 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 19 net new domestic stores in the quarter, for a total of 4,141 stores, in 48 states, the District of Columbia and Puerto Rico.

Depreciation totaled $42 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 and Poor's is BBB and we have a commercial paper rating of A2.

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

And Fitch has assigned us a senior unsecured rating of BBB, as well and a commercial paper rating of F2.

Now, I'll turn it back to Bill Rhodes.

Thank you, Bill.

In summary, we're very pleased with this past quarter's performance.

And our progress encourages us heading into the back half of our fiscal 2009.

However, we understand there is much work yet to be done to build on this quarter's success.

We also remain mindful of the substantial changes occurring in the economy and we will continue to position this Company for success regardless of the macro situation.

We believe our culture is one of our key points of difference.

And while our country is facing some of the most difficult challenges it's faced in many years, we believe our product and service offering is conducive to this environment in both retail and commercial.

While we remain optimistic and believe we can continue to grow our business in 2009 and beyond, I would caution our investors to not extrapolate this quarter's performance for the foreseeable future.

Our focus will continue to be to deliver a superior shopping experience to both our DIY and commercial customers and maximize our long-term performance.

We also understand what it means to be good stewards of our investors' capital and we remain focused on optimizing long-term shareholder value.

We continue to have tremendous opportunities for improvement.

As previously mentioned, 2009 will be about improving our brand of differentiated customer service.

2009 for AutoZone is and will be about great people providing great service.

Four main objectives for 2009 are; A relentless focus on hiring, retaining and training our AutoZoners to make sure we're delivering trustworthy advice.

And in this environment, we have a unique and incredible opportunity to retain our great AutoZoners and strengthen our team with very talented new additions.

As we continue to say, it's a great time to be in this business and an even better time to be at this great Company.

Continual refinement of our product assortment will be the second focus, especially for late model products.

Third, deploying inventory more effectively across our network, with specific emphasis on utilizing our hub store even more effectively in 2009.

And, finally, commercial sales growth, appropriately paced profitable growth across all customer segments.

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

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

We cannot and will not get complacent.

Our story remains consistent heading into our third quarter.

A focus, steady profitable sales and earnings improvement.

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.

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'd like to open up the call for questions.

Thank you.

(Operator Instructions) Our first question comes from David Schick, Stifel.

Your line is open.

Hi, good morning and congratulations on a great quarter.

Thank you, David.

You talked about, during the quarter, accelerated hub store rollout and some expenses around that.

The medical expense ratio.

It sounds like that might lap, or you're working it lower, and the legal fees.

If those were normalized, just sort of in rough numbers, what might the SG&A run rate have looked like?

Well, as we indicated, we leveraged about 80 basis points off of store expenses for the quarter and then we highlighted some of the other additional expense of sale.

That might be an easier way to think about it, which is kind of why we highlighted it that way.

Sure.

So should we think that those things will be normal?

Well, how about the hubs to rollout?

Essentially, what I'm trying to see, is did you pulled it forward or is that a preview of what --?

We pulled a little bit it forward but we really believe that the hub store has a significant opportunity for us.

So as we continue to see an opportunity for us to accelerate the hub stores, we're going to continue to do that.

So, we've had good results on it.

It's very early in the process.

And so we did accelerate a little bit into this quarter.

And so I would expect us to keep a similar pace as we go through the rest of the year.

Okay -- sorry.

Go ahead.

I think it's also important to understand that the hub stores, yes, there's some one-time operating expenses, one-time opening expenses of resetting the hubs but there's also increased ongoing operating expenses.

Okay.

Good.

Just trying to tease it out.

Second, on -- you've talked about business is obviously better.

Traffic versus ticket, are more people in the stores or are they doing more per job?

Could you break that out for us?

Yes, I think, over a long period of time, our traffic count has been down.

But our traffic count clearly improved during the quarter.

And our average ticket continues pretty much on its normal course.

So, more people are working rather than necessarily different work.

Is that the take away from that?

I think that's right.

Okay.

Great.

I've got some others I'll ask offline.

Thank you.

Thank you.

Our next question comes from Dan Wewer, Raymond James.

Your line is open.

Thanks.

Bill, when you look at your stores that are near the CSK locations that have been converted to the Riley model, have you been able to determine if your sales volumes in those stores have been impacted or not?

Well, first of all, from what we see, they're very early in their conversion process.

So there's not a tremendous amount of data points.

What we have seen is, obviously, clearly when they close their stores, we see a slight increase for the four or five days that their stores close.

Outside of that, we can't tease anything material out of the data.

I'm sure you heard the same conference call we did about mid teen sales increases.

And you're -- to make sure I understand.

So, when you're looking at your stores, it doesn't appear that your stores are losing share to the converted locations?

I think that's a fair characterization.

But again, it's very early in the process.

For what we were seeing, we're talking about weeks.

And we'll continue to monitor it very closely, obviously, as they continue to move forward.

I think it's important for us to say, we're very comfortable with our stores, regardless of who they're competing against.

We believe we've got a real good game plan for the long term and we're going to continue to execute that game plan in California and everywhere else.

And as a follow-up question.

Historically, you've told us that gross margin rate is better on your do-it-yourself segment than commercial.

During this quarter, we obviously saw the mix of business growing at retail at a faster rate.

And yet, subtracting out the shrink issue, we didn't really see a significant improvement in gross margin rate.

Are we at the point now where there's really not a margin differential between do-it-yourself and commercial?

No.

I would say that there's still a margin differential between do-it-yourself and commercial.

It contracted a little bit closer, as we've improved some of the commercial margins.

But as we mentioned before, we continue to believe that there's some opportunity for us to continue to grow gross margin.

And gross margins at shrink are still very healthy.

Okay.

Great.

Thanks.

Thank you.

Our next question comes from Alan Rifkin, Bank of America.

Your line is open?

Yes, I'll add my congratulations as well.

A question for Bill Rhodes.

Bill, as you look into your decision to continue to roll out the hub stores and clearly, it seems like it's paying dividends here near term; Can you maybe just compare and contrast the decision to continue to do that, with rolling out additional desks to existing stores?

As only 55% or so of your stores appear to have a desk in them, that seems to be a different philosophy from what others are doing.

Can you just kind of tell us, in your opinion, what the pros and cons of this strategy are?

Absolutely, I'll do my best.

First of all, we don't see the two as being linked at all.

We can do one, both or neither.

Our decision on hub stores is we believe, for both commercial and retail, that one of the keys to success is product availability.

As parts proliferation continues in this industry, it gets more and more difficult to have the appropriate parts in all of your stores across the country.

So, we believe the hub stores allow us a way to get that coverage into the market on a same-day basis and a multiple time per day basis, now, with our new enhancements we're making to our hub store model.

On the other side, as to; Why aren't we accelerating the number of programs that have the -- or the number of stores that have the commercial program in them?

We are focused intensely on getting the best out of the programs that we have today.

We've modestly grown the programs a little bit.

I certainly hope that over time, that we will continue to grow the programs and increase not only the number but the percentage significantly.

But we need to make sure that we have the stores that we have on the program, operating at an optimum level.

And we feel like we still have lots of opportunity there.

Okay.

Another question, if I may.

I certainly realize the sensitivity behind the business dealings with the one commercial customer that you lost and the significant difference that that resulted on your revenue line.

Can you maybe, though, provide just a little bit more color on what you think the reasons were behind you folks losing that business customer?

And please make us more comfortable with the fact that this is not something possibly systemic longer term.

Well, I think there's a couple of data points that you can look back at over time and ones that we look at back over time.

When we try to get into a business that doesn't leverage our strengths, it's very hard to offer a differentiated offering.

And over time, those haven't worked.

In this case, we were going out and buying parts.

Roughly 80% of the parts were outside of the product that we carry in our stores.

A big part of the proposition value that we bring is bringing the high quality value products that we have at great values to our commercial customers.

This did not allow us to do that and so it was a difficult one for us to continue.

There are not significant other arrangements like this.

There are none on the scale of this arrangement in our network today.

And those aren't our focus.

Our focus is to find the locations around our stores that can leverage the inventory that we have in those stores.

So was this more your decision than theirs, it sounds like?

Ultimately, it was their decision to move away from us.

But the other side of it was, it wasn't terribly profitable either.

And again, when you're buying parts and bringing them to a location, there's not a big value proposition there for us.

So, they were very low margin and very low net operating margin.

Okay.

Thank you very much.

All right.

Thank you.

Our next question comes from Matthew Fassler, Goldman Sachs.

Your line is open.

Thanks so much, and good morning to you.

A couple questions, if I could.

First of all, can you talk about the impact of the calendar shift?

And presumably, if it hits you in one quarter, it probably has some residual impact over the rest of the year?

If you can give us some sense as to when it helps you and hurts you?

Yes, I think actually, probably, most of the shift is behind us, as we mentioned in the first quarter, Matt.

But we thought we got a little bit of negative hit on it.

It was certainly well less than 1% comp, I think we said at that time.

We probably got a little bit of benefit from that in the second quarter.

But I think, for the most part, those were kind of the ranges that you should be thinking about it.

And it's pretty much all behind us at this point.

So sort of less than 1% comp, you said, is the impact?

Yes.

Okay.

Second question, can you talk about -- you're obviously pushing deeper into late-model inventory.

As you look at the kinds of parts that you're selling by vintage of car, are you seeing a significant change in that mix as customer behavior shifts?

I would say not materially, Matt.

Obviously, we are seeing a change in the vintage of newer vehicles that we're working on or providing parts for.

But that's primarily driven by, we're increasing our coverage in those areas of vehicles.

So, I wouldn't say that we're seeing a material change in the pattern of where the demand is.

It's just that our ability to fulfill that demand is better than it's been historically.

Got it.

And then, just a couple of questions on some of these sort of tangential balance sheet issues.

You spoke about having identified a couple of areas of exposure on the credit front that you're dealing with.

If you could shed some light on that?

And also, just a little more insight into the decision to stop factoring receivables?

It would be helpful.

Sure.

Yes, I don't think we feel we have any credit exposures, per se.

We actually, feel the balance sheet is very well positioned today.

We feel as though we have adequate accessibility to credit today.

So, we feel pretty good about our position.

I think on accounts receivables, the $55 million program that we have with a third-party bank and it just didn't make sense for us to continue it.

It does help a little bit in freeing up a little bit of capital for us or credit, per se.

That's fairly small in the grand scheme of things.

But the net is, it just didn't make economic sense for us to go forward with that program.

Understand.

Thank you, so much.

Our next question comes from Colin McGranahan from Bear Stearns.

Your line is open.

Thank you, good morning.

Firstly, just on shrink, was that a physical inventory or were you estimating that?

And it sounds like the driver there really was theft and understanding the economic situation.

But with the initiatives you have in place, do you think you can quickly get that back or should we expect kind of a run rate, as long as this economic environment prevails, a run rate that's going to be at a higher level?

Generally, the first part of that, it's a combination of two things.

Obviously, make an estimate throughout the year, but we're taking physical inventories perpetually throughout the year.

So, our trends have gotten a little bit different than what we had estimated.

So yes, a little bit of a true up on physicals and it gives us a little bit better insight as to where we are.

We're taking a lot of actions to try to reduce that rate.

And so, our expectation is that we will make improvements on that run rate as we move forward during the year, both from securing our physical inventory within the stores, as well as making improvements from a systemic standpoint to tighten up controls.

So, look, shrink is something you fight on every single day and we will continue to make some improvements as we move through the year.

That's the best way I can answer it.

And then, secondly, it sounds certainly like transactions and traffic in the store did improve but can you be specific about what kind of price inflation you had in the quarter?

I would say the price inflation wasn't terribly material, Colin.

Yes, I think, probably the best way to think about it, is that a big part of driver this quarter was really on the traffic side of it.

And so, as we had always said before, transactions -- ATV was up a little bit and transactions have been down.

And the way to think about it is, traffic was really the driver for the comp store sales performance this quarter.

Okay.

All right.

Thank you.

Thank you.

Our next question comes from Brian Nagel, UBS.

Your line is open.

Hi, good morning.

Thank you.

I, too, would like to add my congratulations on a nice quarter in a very tough environment.

Thanks.

A few -- just a couple quick questions.

First off, with respect to sales, you saw, we saw, a very clear sequential pickup in acceleration in trends.

Maybe if you could talk a little bit about trend within the quarter, as we forecast over the last few months?

Yes.

I would characterize it as, the second half of the quarter was better than the first half of the quarter.

But I'd also want to go back to what we talked about in our prepared remarks, of, this quarter was the anomaly.

I just don't want everybody saying, "Well, all of the sudden, we're going to straight line 6% comps for the foreseeable future." If you look back, on a historical basis, over the last 3.5 years, our comps have traded in a pretty tight range, that were slightly positive.

So, I just want to caution everybody not to read too much into the fact that there was some acceleration in the back half of the quarter.

Okay.

The second question I have, with respect to the balance sheet, debt levels increased in the quarter.

And very well telegraphed by you guys over the last couple of quarters.

But I just want to check, with your debt to EBITDAR now at 2.5 times, where you told us to anticipate it would get to, are you comfortable now with the capital structure where it is?

Yes, we feel good about the capital structure.

And one thing that we always say clearly, is that maintaining our investment grade credit rating is what really drives everything.

And so, that continues to be the biggest driver and the most important thing for us as we look forward.

And we'll continue to monitor that, in optimizing where we can deploy capital.

And monitoring the credit markets at the same time.

And the final question I have, and I apologize if you mentioned this in your prepared remarks, but the working cap, we saw a rather large pickup in working capital in the quarter.

You talked about the change in receivables.

What are the other factors, potentially, behind jump up?

No, problem.

Yes, receivables was one, at $55 million.

We also mentioned that we had an estimated tax payment that occurred at the tail end of Q2 this year.

And last year, it occurred right at the beginning of Q3.

So, there was a timing of tax payment that impacted working capital as well.

Okay.

Thanks a lot.

Again, congratulations.

Thank you.

We have a question from Mike baker, Deutsche Bank.

Your line is open.

Thanks, guys.

So two quick questions.

One, can you describe a little bit better for me the hub store program?

How much stores -- or is it done by regions, or how is it working that you rolled out this quarter?

And then what should we think about in terms of a rollout going forward?

Just trying then to figure out what the SG&A impact is going to be going forward?

Thanks.

Yes.

We have 143 hub stores in total/ And what we're talking about here is really an enhancement to this hub store operations.

It includes further extended product offerings and also an increase in frequency and delivery to the satellite stores.

We're still in the very early stages of this rollout.

We've tested it in a small number of hub stores over the course of the last 12 weeks or so.

We've rolled it out to probably a little more than 25% of our hubs.

We're going to stop and evaluate to make sure that we're still on the right plan, that they're still delivering the performance.

And then we'll look to expand it even further as we go through it.

So those up front costs that you talked about, those are up front costs in each of the stores that you do it, not sort of corporate up front costs, correct?

Yes, there's two components of it.

One is up front costs.

And if you think about it, just resetting a store to refresh the inventory mix and expand the inventory assortment.

And then, there's an ongoing costs from increased frequency of delivery of both the transportation and payroll costs.

Okay.

Thanks.

So one more question on it.

Since you did -- you were helpful enough to break out what the SG&A impact was.

Any chance that you'd tell us what the comp lift was from this rollout?

Yes, we want -- it's too early in the program and we'll keep you posted on our success as we move forward.

Okay.

Thanks.

Our next question comes from Kate Mcshane, Citigroup.

Your line is open.

Hi, good morning.

Good morning.

I'm just trying to just better understand the 6% comp store sales for the quarter and why you may not think it's a trend going forward?

How much of the comp store sales do you think were from pent-up demand, since we have been in a difficult macro environment for quite some time now?

And how much do you think was given -- or was driven by market share gains from smaller players?

And what exactly is giving you concern that this can't be pulled forward for the next couple of quarters?

Well, I wouldn't say -- we're certainly working to see if we can get it at the same levels, if not higher but we're also cautious in the way we plan our business.

As we mentioned, we did see some improvement in our market share trends throughout the quarter.

As far as pent-up demand, that's really hard to gauge, exact pent-up demand, and when it frees itself.

The best point that we have to look at is the gas prices.

And obviously, gas prices are about 50% of -- well, not quite 50% but they're 50% of what they were last summer.

And so we believe that miles driven improved a little bit in December.

They were still down but the trends were better.

We're hopeful that we're going to see improvements in that in January and February and beyond.

So, we think that there's some macro factors that attributed to it.

But we also believe that we're doing -- our AutoZoners are doing a very good job.

We were prepared for this level of business and did an exceptional job in this environment.

Okay.

Great.

And then, if I could ask one more question, just about your store growth in 2009 and how your strategy may or may not change as a result of the environment?

I don't think that we're changing our growth rate strategy, overall.

I think that we'll continue to find opportunistic real estate in this environment.

Maybe more so than we were previously and we may be able to get into markets that we previously couldn't have gotten into it.

So I think there will be increased opportunity.

But I think our growth rate at the moment will remain in line with our long-term strategic view.

Great.

Thank you, so much.

Thank you.

We have a question from John Lawrence, Morgan Keegan.

Your line is open.

Yes, thanks.

Good morning, guys.

Good morning, John.

Bill, just to sort of follow on that question a little bit.

Where else would you look -- you mentioned a couple of the headwinds that are still out there.

What would be some other things throughout the supply chain with your strong credit availability, et cetera, that you might be able to see some tail winds, other than say real estate, parts availability, et cetera?

And secondly, what are you seeing in the commercial business as it relates to dealership situation?

I think it's early on in the dealership situation.

We see the same numbers that you see relative to the number of dealers that could potentially close.

Which obviously, if some of that business gets shifted off to our customers, that will work out well for us.

So, I think it's a little bit early in that.

And quite frankly, it's a little bit early in the real estate market as well.

We're beginning to see a little bit of softening but we haven't seen significant softening.

And then from a deflation standpoint, we would expect to see some lowering of costs in some of our core-based products, as the commodity prices begin to recede a little bit.

So, we think that there's some long-term benefits on a variety of fronts throughout the entire cost structure of the organization.

Yes and not to beat a dead horse on the deferral and the rate of change in the product mix, but as you look through some of those categories, is it obvious that certain types of products have been deferred for a period of time and the rate of sale is just much higher than a normal time frame?

John, clearly, there have been some acceleration in maintenance products.

And whether or not that is deferred maintenance that's being picked up right now or the notion that people are hanging on to their cars longer and planning on hanging on to their cars longer, and therefore, they're spending more time maintaining their vehicles.

I think that's yet to be seen, too early to tell.

Okay.

Great.

Thanks for your help.

All right, thank you.

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

Your line is open.

Hi, good morning, everyone.

Good morning.

Just a quick question on the impact of oil deflation.

You didn't take credit for it in your comps but I would think that was a headwind to the sales figures for the quarter?

I wouldn't think that our oil prices are materially different than they were at this time last year, Matt.

Okay.

And then, in terms of the increased traffic that you're seeing in the stores, is there a way to attribute that to existing customers that are visiting more often, or new customers perhaps based on the data you have from your rewards card?

I think we're seeing a mix of both.

Our rewards data does give us the opportunity to have insights into customers' activity.

And I think we're seeing that both, we're getting more frequent visits from our high-traffic customers.

And we're also getting new customers coming into our stores.

And so, is the rewards card redemption also higher?

And if so, did that have any impact on the margins?

Yes.

It's clearly higher.

Obviously, if our business is up, it's going to be up.

And, yes, it does impact our margin.

Okay.

That's all I've got.

Thank you.

All right.

Thank you very much.

Our final question comes from Scot Ciccarelli, RBC.

Your line is open.

Hi, guys, how are you?

Good.

A couple questions here.

Given the better inventory availability, focus on employee training, et cetera, do you guys have much of a feel for whether you saw a change in the conversion rates in the quarter or whether it was just more people in the stores?

Conversion is a very difficult thing to measure overall.

We don't have a scientific way of tracking it.

But clearly, intuitively, we believe that our parts coverage is today than it has been.

We believe that our AutoZoners are better trained than they have been, although they operate at an excellent level today.

The Z-net addition that we did over a year ago has helped improve the amount of information that we have on the parts catalog -- or on the parts counter today.

So, we think that there's a lot of things that we've done to improve the shopping experience.

And if you look back at our customer service scores, you'll see that our shopping -- that customers are telling us that the shopping experience is getting better.

So, a lot of things that point to that, although scientifically, we couldn't tell you the conversion rate has actually increased.

Okay.

I understand.

And then, obviously, you guys benefited from the increase in traffic, both retail and once you make the adjustment in commercial, both did very well.

Are there any product areas that weren't very good?

And can you kind of figure out or have you identified why?

Is it just more discretionary items or did everything do pretty well during the quarter?

I think, as we mentioned, we saw a general lift across the vast majority of our merchandise categories and geographies.

Clearly, as we have highlighted, there are a couple of them that have more challenged.

Wash and wax and accessories, which are some of the most discretionary items in our stores have been more challenged.

Although, their performance improved as well during the quarter.

Okay.

Great.

Thanks a lot guys.

Thank you.

Well, before we conclude the call, I'd like to take a moment to reiterate that our business model remains solid.

Our customers continue to tell us we're improving on our efforts to meet or exceed their needs.

And market share data confirms their opinions.

We have a solid plan for 2009, focused on growing all facets of our business, and a culture that is second to none.

But I want to stress that our efforts have a long-term focus.

We view ourselves as in a marathon, not a sprint.

Our focus is on our critical success factors.

As we continue to focus on the basics and manage our capital appropriately, we are confident that AutoZone will continue to be incredibly successful.

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

Have a great day.

That does conclude today's conference.

Thank you for participating.

You may disconnect at this time.