汽車地帶 (AZO) 2009 Q3 法說會逐字稿

Good morning and welcome to the AutoZone Conference Call.

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

Please be advised today's call is being recorded.

If you have any objections please disconnect at this time.

This Conference Call will discuss AutoZone's Third Quarter financial results.

Mr.

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

The Conference Call will end promptly at 10:00 a.m.

Central Time, 11:00 a.m.

Eastern Time.

Before Mr.

Rhodes begins the Company has requested 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 of assessments made by our Management in light of experience and perception of historical trends, current conditions expected, future developments and other factors that we believe to be appropriate.

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

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

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

For a reconciliation of these metrics please see AutoZone's Press Release in the investor relations section at www.AutoZone.com.

Mr.

Rhodes, you may begin.

Good morning and thank you for joining us today for AutoZone's Fiscal 2009 third quarter conference call.

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

Regarding the third quarter, I hope you've had an opportunity to read our press release and learn about the quarters results.

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

AutoZoneInc.com.

Please click on quarterly earnings conference calls to see them.

To begin, I'd like to thank and congratulate all our AutoZoners for their efforts that lead to us achieving our 11th consecutive quarter of double digit EPS growth.

It is the dedication and committment of our AutoZoners across the Company that makes us successful.

For the quarter, we experienced significant growth with domestic same-store sales increasing 7.4%.

Following last quarters 6% and EPS increasing 26%, our best performance since the Second Quarter of Fiscal 2004.

As we have stated on many occasions, we believe our business is not inherently cyclical in nature and given the ongoing macroeconomic challenges facing the global economy, we believe AutoZone is well positioned to help our customers effectively maintain their vehicles at a great value.

We believe we can make a material difference in helping both our retail and commercial customers save money and time by doing the job right the first time.

We believe both the headwinds and tail winds facing our retail and commercial customers have not changed over the last few months.

While gas prices declining from the $3 range last October has had a positive economic impact on our customers, we have become mindful of the steady creep in pricing since early January.

Expenditures relating to gasoline can impact what dollars remain in our customers weekly budget, to maintain their household vehicles.

There are also several other factors occurring within the current economy that affect both our consumer and our industry including the credit crunch, the decline in housing prices, higher unemployment, and fewer new vehicle sales.

Clearly, the net result of these influences combined with our AutoZoners strong execution have resulted in the last two quarters of strong sales results.

These improved sales results have given us the opportunity to accelerate in investments and areas where we see significant long term opportunities.

While I won't jump ahead to additional thoughts this morning, I do want to let everyone know, we feel we're well positioned for the future regardless of the macroeconomic environment.

I know many will be asking what our expectations for sales growth will be for the fourth quarter and we can continue with our recent, -- and can we continue with our recent same-store sales results.

While the macroeconomic indicators continue to be challenging, a net positive for industry growth trends, we are planning for a more conservative growth rate for the remainder of the year.

Our trade association, the automotive after market industry association has historically reported overall growth of approximately 4%.

We would encourage everyone to plan growth trends at more reasonable, more historic levels.

As important as our string of 11 straight quarters of double digit earnings per share growth has proven, we don't have to achieve these levels of accelerated same-store sales growth to deliver strong growth in earnings per share.

We would like to spend a few moments updating you on our current areas of focus.

Last quarter, we mentioned our goals of retaining and continuing to hire the best potential AutoZoners.

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

We also feel the current challenges in the economy continue to provide us with a unique opportunity to hire additional very talented future AutoZoners and our team is vigorously pursuing this opportunity.

Additionally, we are refining and expanding our product assortment, and we continue to rollout our enhanced hub store model, accelerating this initiative even further than we planned for this fiscal year based on the success of our initial implementations.

Growing our commercial business in a profitable manner remains a top priority.

We rolled out a new and improved AutoZone.

com website that has additional features and functionality that will improve our ability to help our customers find the parts and trustworthy advice they've come to expect from AutoZone.

Finally regarding our systems.

We've been taking a more holistic approach.

We've begun to integrate some of the technological advantages we have in our DIY business into the commercial business.

We feel the more we can simplify our systems across AutoZone's businesses, the more effective and efficient we can become.

Our strategy is simple and straightforward.

We're investing in our AutoZoners and their training, adding additional parts coverage and leveraging all these with systems to help our AutoZoners provide our customers with a superior shopping experience.

All of this, of course, is supported by our critically important culture of customer satisfaction.

We remained intensely focused on these objectives this past quarter.

We will attempt to address several items that we believe will be on the minds of many listeners this morning.

First, let's address sales trends during the quarter and for that matter, regional performance.

The quarter began slightly stronger than our reported comp of 6% in the second quarter and remained relatively strong throughout.

While certain weeks were impacted more materially due to calendar shifts, like Easter falling at a different time than the previous year, there wasn't anything material to report.

And regionally, there wasn't any one part of the country that was noteworthy for demonstrating a strong change in trend, all areas exhibited strength.

Secondly, we felt inflation had a minimal impact on our comp store sales results for the quarter, while we have begun to see some commodity price decreases, we have not experienced wholesale cost declines.

While certainly inflation and deflation on cost of goods will play an ongoing story with gross margins, that was not a major story line this quarter.

Third, we did see a small shift in the types of merchandise sold toward more promotional items; however, 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.

However, it is important to note that categories we define as failure and maintenance continue to outperform the more discretionary categories.

Fourth, we are continuing to see positive trends in our transaction numbers.

The primary driver of our improved sales performance has been an improvement in our customer account trends while our average ticket has continued to grow at a generally consistent rate.

Fifth, we are continuing to see sales traction with our commercial customers.

We are very encouraged about our future growth opportunities in this segment.

As we continue to lap the sales headwind from the exit of a large commercial customer discussed last quarter, we continue to see our sales gaining traction in our most important segment for growth and profitability, our up and down the street customers.

These customers represent the largest customer segment in the marketplace, and we feel we're servicing them well and our performance in this sector reinforces our belief.

We've also been pleased with our ability to increase our market share in the commercial business.

During the quarter, we repurchased $65 million of stock representing 450,000 shares, ending the quarter with an adjusted debt to EBITDAR metric of 2.3 times.

Although we have not adjusted our credit metric of 2.5 times considering the volatility in both the credit and equity markets, we were a bit more conservative during the quarter than we have been historically and we did not fully anticipate our improved performance.

We remain committed to operating at a 2.5 times EBITDAR credit metric over the long term; however, we recognize there may be market conditions that warrant operating at levels slightly below 2.5 times in any particular quarter.

Our stock buyback program remains a key component of our capital allocation strategy.

We remain optimistic about our prospects for the fourth quarter of this fiscal year.

I do want to remind everyone, the quarter we've just started is 16 weeks long; however last years fourth quarter had a 17th week.

Therefore, please refer to our fourth quarter earnings release dated September 22, 2008, to see our pro forma financial results for the 16 weeks to understand the impact of the 17th week in the prior years quarter.

Before I get started this morning on our financial results, I'd like to draw your attention to the last page of our press release.

We've changed our segment reporting.

After much discussion, we've decided to break out a distinct segment called total auto parts from an all other category.

The all other sales category is representative of our all data and eCommerce businesses while the difference, as you'd expect, total auto parts stores, is made up of our domestic stores plus Mexico.

While we've combined the businesses for financial reporting, we will continue to break out our domestic commercial results in order for the reader to benchmark our results.

We will report further details on this segmentation in our upcoming 10-Q, but for now we have provided this new sales break down.

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.

For the quarter, total domestic retail sales increased 10.4%, an improvement from last quarter's 8.9% growth.

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

This quarter, we updated 16 of our 40 plus major merchandise categories.

These 16 category updates were split between hard parts and sales floor updates.

Refinement of our merchandise assortment is a core element of improving our ability to say yes more frequently to our customers and meet or exceed their expectations.

We remain committed to the timely execution of merchandise assortment updates.

I'll break my comments into major categories regarding our sales performance and retail this morning, specifically I'll address what we're seeing from a merchandise sales perspective that's helping to drive our strong performance, then I'll touch on some income statement investments we're making in our stores that we're very excited about.

Next I'll highlight the training and technology investments we're making.

Fourth, I'll spend a moment on a new marketing theme we've introduced for our retail customers and finally I'll touch on the macro trends.

Regarding merchandise mix and trends, we saw generally the same trends in the third quarter that we experienced in the second quarter.

For the purposes of this discussion, we have evaluated our performance in terms of three distinct categories of products: maintenance, discretionary, and failure categories.

The mix of merchandise sales defined as maintenance related continues to perform well for us.

In fact we've seen three quarters in a row of this category showing noticeable increases in overall mix.

Typical examples of product categories we classify as maintenance would be shocks and struts, wiper blades, oil filters and brake pads.

We attribute this trend to consumers changing their perspective on the importance of their vehicle and their likelihood of holding on to that vehicle for a sustained period of time.

Failure items are by their very nature, less discretionary than either of the two other categories because they require repair for the vehicle to operate effectively.

Examples of failure related merchandise categories would be drivetrain, engine management, batteries, and starters and alternators.

We've continued to see good performance in these categories.

Sales of discretionary related items remain under pressure, as the name implies these categories are more want than need based purchases and as our customers have come under pressure for the economy, they have elected to defer more of these types of purchases.

We expect this trend will continue as consumers remain challenged by all the events previously mentioned.

Regarding our investments in the stores we have made significant investments in two key initiatives during the quarter.

First, we began resetting the hard parts assortment in our older, smaller footprint stores to better align our space allocation with the current product mix needs.

Because these stores are space constrained, and we hadn't reassessed the space allocations of particular product categories in some time, we were suboptimizing their performance.

We tested a small number of resets earlier in the year and were encouraged with the results.

During the third quarter we began implementing this initiative on the complete store base, about 200 stores, and will complete this initiative in the fourth quarter.

Secondly, as we discussed during the second quarter conference call, we continued implementing our new super hub concept.

These super hubs have three distinct purposes: improved market based coverage, improved in stock levels in satellite stores through daily replenishment when necessary, and finally, reduction in excess inventory throughout the network by reducing the need for all stores to carry select products.

We have been very encouraged by our results to date and at the end of the third quarter we have implemented the super hub concept in about 40% of our existing hubs.

Based on our success thus far, we've accelerated our plans for this year and are in the process of implementing this initiative in the next set of hub stores.

Third, training and technology enhancements continue to be a key priority to improve customer service and grow sales.

This past quarter, we continued with our Wittager meetings across the Company, what it takes to go the job right.

While the purpose of the meeting was to coach on improved selling techniques, the primary theme Tom Newbern, our Senior Vice President of Store Operations and all of our field leadership conveyed is sell the complete job and therefore, help the customer.

And do what it takes to do the job right.

Additionally, we continue to refine our electronic parts catalog, Z-net, to have more technical and product information at our AutoZoners finger tips.

As previously mentioned, we also rolled out a new website this past quarter.

Our new website has a reengineered platform and this new platform gives us the opportunity to substantially improve our interactions with our customers who elect to use the web for research, direct purchases, putting parts on hold or other means.

This new platform also gives us the ability to quickly add other key elements which are currently under development.

The fourth item I'd like to talk about is our marketing message for the retail customer.

We began using a new theme on our radio ads during the third quarter and will utilize it in TV spots this quarter.

Just because you're doing it yourself, that doesn't mean you have to do it alone.

While the message itself is new, the theme is certainly not new for AutoZone.

It's at the core of our offering to provide trustworthy advice.

We continue to believe marketing AutoZone's strengths, trustworthy advice, great merchandise, and the right price, will continue to positively resonate with our customers.

Regarding macro trends, during the third quarter, unleaded gas prices started out at $1.96 per gallon and steadily climbed to $2.24 a gallon by the last week of our quarter.

While the prices at the pump remained approximately 40% below last years third quarter average of $3.32 a gallon, it is noteworthy that prices were up 13% from just last quarters average price of $1.78 a gallon.

Regarding miles driven, we saw a decrease in miles driven in January, February, and March; however we have seen some sequential improvements.

Miles driven is one of the two key statistics that over the long run, correlate to our sales results better than anything else.

The other is the number of seven-year-old and older vehicles on the road.

Regarding the vehicle count of our kind of vehicles or OKVs, it has continued to increase over time.

Over the next two months our trade association, the AAIA is expected to report on the number of registered vehicles on the road and I'm optimistic the data will show an aging fleet with the average age of the light duty fleet somewhere around 10 years old.

However an obvious question to us is the decline in vehicle sales on the front end of the curve.

With the SARS vehicle count being 9.3 million through April, down from approximately 17 million vehicles sold in more recent years, and the resulting challenges the car manufacturers are experiencing, we are mindful of the potential passage of a Cash for Clunkers bill in Congress.

The passage of such legislation could lead to the retirement of some older vehicles.

It has been interesting to watch the Cash for Clunkers debate move from an initiative initially designed as an environmental protection initiative now morph into a vehicle sales stimulus initiative.

That being said, we are working with both of our after-market industry associations, the AAIA and CARE to insure our industry's voice is heard on this issue.

If the objective is to improve emissions and fuel economy versus stimulate new car sales, we believe it would be much more productive and beneficial to a broader group of the motoring public to provide vouchers for vehicle repairs or parts purchases.

In this economic environment, many of the people driving older vehicles cannot afford to purchase a new car, nor can they gain access to reasonable financing; however, based on the estimates we have seen, the outcome of this legislation is not expected to have a material impact on our business in the short or long term.

Regarding weather, we believe it had a slight positive impact on our results this past quarter.

I'd also like to talk about the high rate of unemployment our country is currently experiencing and its possible impact on our sales results.

Unemployment has increased steadily over the past few months with April ending at 8.9%.

At this point, we don't believe the rise in unemployment has negatively impacted our performance and in fact, it is likely helping; however, we are very mindful of this rise and continue to monitor it closely.

We would also like to address the impact the Chrysler bankruptcy and the current events at General Motors might have on AutoZone's vendor community.

While we certainly understand the pain this event is having on many individuals across the country, we are communicating regularly with all of our vendors.

Although we currently believe that we will not experience a supply chain disruption, we will continue to monitor and proactively take measures to address any potential concerns.

At the moment, we are not aware of any significant supply chain disruptions from this issue; however, we continue to monitor it on a consistent basis.

For the trailing four quarters, total auto parts sales per square foot were $243.

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 4.9% versus last years quarter.

We are pleased with the underlying momentum we have in this business in spite of the loss of a substantial sales from the large customer we highlighted last quarter.

This headwind will continue for the next few quarters as we've worked with this customer to effectively unwind this relationship.

I'd like to take this opportunity to commend our entire organization for their committment and diligence in developing a strong operating model and sales organization to capitalize on this tremendous opportunity.

Much work is left to be done but our progress to date has been substantial and encouraging.

We now have our commercial program in 2276 stores supported by 143 hub stores.

During the quarter, we opened 24 additional programs; however our main focus remains on building and developing our salesforce.

We are targeting sales growth through first increased penetration of existing customers and second, on acquisition of new customers in our service radius.

We operated approximately 1700 programs, a subset of the 2276 total programs, with what we've previously described as additional resources, such as outside salespeople and incentive compensation.

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

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

We continue to work closely with our national account customers and have developed strong businesses with many of those customers.

Also we continue to develop our public sector business and have experienced substantial growth over the previous year in this customer segment, although it is currently small in comparison to other segments.

Over the past quarter with the success we were seeing, we've again added to our outside sales staff.

We will continue to invest in this key growth strategy going forward.

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

We have provided our salesforce with more tools to help them be more productive on their outside sales calls.

Our salesforce automation efforts will only continue to help our organization expand relationships and grow sales into the future.

We're researching customer life cycle trends to understand what customers most demand from us as a supplier.

In summary, we believe we are constantly enhancing our offering in this business and as a result, we can build on this momentum heading into this quarter and far beyond; however, we are in this business for the long run and at just over 1% market share, we have a tremendous long term opportunity.

Our Mexico stores continue to perform well in the quarter.

We opened 10 new stores during the third quarter and currently have 168 stores in Mexico.

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

For this business, however, it is important to note that the peso exchange rate to the dollar remains a very difficult comparison.

At the end of the quarter the exchange rate was at approximately 13.0 pesos to the dollar, up from approximately 10.5 pesos to the dollar just a year ago.

This exchange difference remains a pressure point on the U.S.

dollar earnings comparison.

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

Our ongoing committment 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.

Bill?

Thank you, Bill.

Regarding the third quarter, for the 12 weeks ended May 9, we reported sales of $1.658 billion, an increase of 9.3% from last years third quarter.

Same-store sales or sales for stores open more than one year were up 7.4% for the quarter.

This same-store sales result was a sequential improvement from last quarters 6% growth.

We experienced sales growth from both our retail and commercial customers; however retail performed at a higher level than commercial.

In the third quarter, gross profit as a percentage of sales was consistent with last years quarter, while operating expenses as a percentage of sales decreased by 40 basis points.

This resulted in an operating margin of 18.4%, up 41 basis points from last years quarter.

Operating profit increased 11.8% versus the prior year.

Net income for the quarter was $174 million, an increase of 9.5% and diluted earnings per share increased 25.9% to $3.13 from $2.49 in the year ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 24.5%.

We're proud to report that this metric continues to improve over last years 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 this 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 50.2 percent of sales, essentially flat compared to last years third quarter.

In the third quarter, gross margin was impacted positively by leverage on distribution costs due to improved efficiencies and lower fuel costs, but was offset by the impact of promotional offerings.

Promotional offerings for the quarter were consistent with prior quarters but there was no substantial changes to our promotional offerings; however the penetration of these offerings did increase as our consumers looked for ways to save money.

Last quarter we discussed our shrink expense deleveraging growth by 30 basis points.

I'm happy to report this morning, shrink results improved versus last years third quarter.

We believe we are gaining traction on the initiatives we instituted to minimize this expense.

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

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

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; however we have seen a move to maintenance categories over more discretionary merchandise categories.

As a point of clarification, the age of vehicles being serviced as it relates to our retail customers has not changed over the last couple of quarters.

For example, we are not servicing far younger vehicles.

The distribution remains generally consistent.

Also, I should address the mix question many of you might have regarding the shift in sales to foreign versus domestic branded car parts.

We cover parts for all makes and models but there has not been any material shift in mix.

Over time we have been selling more parts of import brands but there's not that many material shifts in that mix.

Our Duralast, Duralast Gold and Valuecraft 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 to a targeted gross margin percentage as our key focus is on increasing absolute gross profit dollars.

SG&A for the quarter was 31.8 percent of sales, down 40 basis points from last year.

Our leverage came primarily from higher sales volumes; however offsetting some of this leverage, we purposely invested in our continued accelerated super hub store rollout discussed previously on the call and to a lesser degree, the resets of our smaller footprint stores.

These expenses were primarily payroll related in order to set the stores appropriately for the new product assortment but a component of these expenses is ongoing due to the costs associated with increasing the frequency of delivery to the satellite stores.

These costs delevered operating expenses by approximately 50 basis points on the quarter.

As previously mentioned we've implemented the super hub model in about 40% of our hub base and are rolling out the next set of stores during the fourth quarter.

It is important to note our rate of implementation of investment initiatives might increase or decrease due to changes in our business trends or due to additional information from our assessment of these initiatives.

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

While we've certainly invested in our business over the last couple of quarters, our sales results --- as our sales results have warranted, we remain confident in our ability to manage expenses at a lower level if our sales environment warrants.

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

EBIT for the quarter was $305 million, up 11.8% over last year.

Interest expense for the quarter was $31.5 million compared with $25.3 million a year ago.

Debt outstanding at the end of the quarter was $2.406 billion, or approximately $500 million more than last years balance of $1.932 billion.

Our adjusted debt level at is 2.3 times EBITDAR.

We're lower than last quarter, however, as we discussed earlier on our call, we remain committed over the long term to our 2.5 times target of leverage metric.

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

We remain confident in both our business 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%, basically flat with last year.

For the fourth quarter we expect to run a rate of approximately 37%.

Net income for the quarter of $174 million was up 9.5% versus the prior year.

Our diluted share count of 55.5 million shares was down approximately 13% from last year.

The combination of these factors drove earnings per share for the quarter to $3.13 up 25.9% over the prior year.

Relating to the cash flow statement, in the third quarter we generated $387 million of operating cash flow.

On a go forward basis, we continue to see opportunities to increase operating cash flow.

We also repurchased $65 million of AutoZone stock and at the end of the third quarter, we had $396 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 reported an inventory balance of $2.2 billion up 6.4% versus Q3 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 2% at $516,000.

Accounts Payable as a percent of gross inventory finished the quarter at 93.7% versus 88.9% versus last years third quarter.

For the quarter, total working capital was a negative $528 million versus last years balance of a positive $3 million.

A large percentage of this improvement was driven by the classification of $456 million from long term debt to short-term as both our bank term loan and commercial paper were classified as short-term this quarter.

This classification is strictly due to the fact that our existing revolving credit facility expires in May 2010.

We expect to have these items classified as long term by the end of the next quarter as we are currently in the process of renewing our credit facility which we expect to have completed during the fourth quarter.

Net fixed assets were up 2% versus last year.

Capital Expenditures for the quarter totaled $62 million and reflect the additional expenditures required to open 46 new stores this quarter, Maintenance on existing stores and work on development of new stores for upcoming quarters as well as various information technology investments, most notably our upgraded website.

Specifically related to new store openings, our new stores remain on track and we continue to see opportunity to open stores in the U.S.

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

We believe opening stores during this more difficult economic time to be beneficial.

We opened 31 net new domestic stores in the quarter for a total of 4172 stores in 48 states, the District of Columbia and Puerto Rico.

Depreciation totaled $41 million for the quarter, higher than last years third quarter expense at $38 million 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 BBB, and we have a commercial paper rating of A2.

Moody's Investor Services assigned us a senior unsecured debt credit rating of BAA2 and a commercial paper rating of P2 and Fitch assigned has a senior unsecured rating of BBB as well and commercial paper rating of F2.

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

Thank you, Bill.

In summary while we're very pleased with this past quarters performance, we also understand that we must remain focused on our main objectives in order to continue to grow both our retail and commercial sales.

Our team is executing well, very well, and we feel we are well positioned for success; however, there are no guarantees.

We earn our customers business on a daily basis.

Our competition remains focused, so we must continually improve our customers experience to improve our results.

While this third quarters results continued the success we've experienced in the second quarter, we understand and want to highlight again for each of you that our industry's historical sales growth rates have been more conservative in the range of 4% for total sales growth.

We expect to continue with our current game plan for the upcoming quarter.

We remain committed to differentiating ourselves through continuing to develop our great people who provide great service.

Four major objectives for 2009 continue to be 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 always great to be an AutoZoner.

Second, continual refinement of our product assortment, especially for late model products.

Third, deploying inventory more effectively across our network, with specific emphasis on utilizing our hub store network, even more effectively and finally, commercial sales growth appropriately paced, profitable growth across our up and down the street, national account and public sector 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 facet of our business.

We cannot and will not get complacent.

Continual focus on customer service will remain our key point of differentiation and AutoZoners across the Company are committed to providing that wow customer service, our patrons have grown to expect.

We continue to feel confident in our long range plans.

We believe we have the opportunity to continue to grow sales across retail, commercial, Mexico, and all data.

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 offer 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 Alan Rifkin, Banc of America.

Thank you.

Good morning.

Bill, I'd like to just touch on the continued rollout of the hub stores.

If you could just provide a little bit more color on what benefits you're seeing in the markets where you have, in fact, already rolled out the hub stores.

And when should we see this program actually finish?

And what was the incremental cost in the quarter if you could shed some color on that as well?

Let me start with strategically what's going on with the super hubs.

First of all, we're still in the learning phase, Alan.

We implemented five super hubs about a year and a half ago and let them run for a year so we could refine their operations and understand the impact of those.

As we entered this year, we plan to go to the next set of stores and we did that and we basically completed that next set of stores at the beginning of the third quarter.

As we continued to monitor the results of the larger base of stores, we were very encouraged with what we were seeing not only in the hub stores but also in the satellite stores.

From the sales perspective they're driving sales through two primary contributors.

Number one, they're adding incremental SKUs to what our normal hub stores hold into the local marketplace and then secondly, they're increasing the frequency of delivery so in some stores before you might have had one delivery from the hub store today, today you'll have three.

And so they're making easier access to those hub store parts.

As far as when we'll complete it, candidly, we haven't determined that yet because we're ahead of where we anticipated being.

That's why we're going out and rolling out the next set of stores this quarter.

We're going to continue to monitor those and we'll look into next year to see how we can continue to accelerate.

Bill do you want to address the cost?

Yes, Alan on the cost component as we mentioned in the press release, we had about 50 basis points from higher incentive comp and investments in the hub stores so I'd split that and say the hub stores probably around 20 basis points or so of the incremental investments.

Okay.

But Bill, is it fair to assume that since you're accelerating the rate of implementation that you are seeing desired effects thus far?

Yes, and I would even characterize it stronger than that, Alan, because we're accelerating because we saw even better performance out of those stores.

And that's not just due to the general lift in sales that we've seen, we're looking at this versus control stores, we've been quite encouraged with the results.

The age-old story, parts availability in this business is imperative and this helps us strengthen our position and parts availability.

Okay, and one last follow-up if I may.

We appreciate the break down with respect to your revenues, classifying them as maintenance, discretionary or failure.

Would you care to just provide some color as to what proportion of your revenue base each of these constitute?

We'll take a look at that.

I would say that probably 50% or so of that is towards maintenance and you can split the rest of it between the other two categories.

And that's not something we can easily answer off the top of our heads because it's not the way we track our business on a regular basis.

We look at it by major categories.

We've put this distinction out because we are seeing some different trends, particularly with maintenance categories over the last several months.

Okay, thank you very much.

All right, thank you.

Thanks Alan.

Our next question comes from Dan Wewer Raymond James.

Your line is open.

Thanks.

Bill, the three leading companies in this sector are all achieving strong top line growth but there seems to be an uncoupling in the trend in gross margin rate with AutoZone not showing the same rate of improvement as the others.

You had cited increased promotional activity, I guess precluding any benefit for AutoZone in the quarter, so I wanted to see if you could elaborate on that.

Is this in response to CSK rolling back their every day pricing and your need to match that or is it simply your customers hitting your ad items more frequently than they have in the past?

Well first of all characterize the promotional activities as broader than just ad items.

Certainly it has ad items and we also have other things in there like our loyalty card.

And what we've seen over a period of time is that we have seen our customers migrate more to those promotional offerings.

We have not substantially changed our promotional offerings over the last two years, but as this economic cycle has become more difficult, we've seen more people migrate to that.

I want to be very clear, this was not any kind of response to CSK or their conversions.

Obviously, our pricing philosophies have remained the same for a long period of time.

And as we've said quite a few times, elasticity in this business is very different than most other retail sectors.

Clearly on failure related items, they are quite inelastic, so I don't want anybody to missread our notion what we've seen is just a gradual shift or an accelerated shift in the promotional offerings.

Also understand that we're articulating on a gross margin that was flat, so the magnitude of the numbers that we're talking about are really quite small.

Right.

And then a separate question.

On your fourth quarter sales guidance and you're referring to perhaps returning to a normalized rate of 4%, but that was for the industry up until two quarters ago, AutoZone same-store sales have been approximately flat for about four years, so were you suggesting to look at that four year run rate for AutoZone, or think more in terms of the industry comp average of around 4%?

It's a great call out, Dan.

I actually specifically said that the industry has grown on a 4% total level, which is generally consistent with what we've experienced prior to the last two quarters.

We've had as you mentioned flat comps and our square footage growth rate has been about 4% so we've been growing basically in line with the industry.

Now, the one thing that we didn't highlight in the call is that we have seen, I mentioned that we've grown market share and commercial.

We've also seen healthy gains in market share and retail, so the notion that the industry may decline or may go back to more normalized levels at some point whether it's this quarter or 12 months from now or whatever, we believe that we have opportunities to enhance the way we offer our services to our customers and improve our market share.

But our objective is never to grow zero comps, although we did it for a while.

Just to make sure I understand, you are suggesting for the upcoming quarter and excluding for the fact you have one less week that flat comp would be a more reasonable outlook?

No.

First of all we don't give guidance, so that we're specifically not trying to give guidance.

That is our philosophy.

What I'm trying to say is don't straight line a 6% or 7.4% comp into the foreseeable future.

It's not consistent with historical trends.

Great.

Thank you.

All right, thank you.

Our next question comes from Matthew Fassler, Goldman Sachs.

A couple of quick ones here.

As you think about modulating expenses and you said that you can I guess guess it up and pull back essentially as you see fit, what kind of lead time do you need as you think about projects like your hub store investments and training, etc., in order to pull back on SG&A commitments?

You know, Matt, historically we've demonstrated an ability to be relatively nimble on a lot of these expenses and we've been able to do them in quarter on many cases.

So we position ourselves and the organization positions itself so that it can react to positive and negative sales trends on a fairly fluid basis.

So I would say actually in quarter in many cases.

Got it.

A second question I have just to understand within commercial, of the sales growth that you're seeing how much do you think relates to your initiatives and how much relates to the market?

I guess you have control stores where the resources that you're allocating to the business are probably unchanged from a year ago, more or less, and are you seeing those stores respond as strongly or would you say that the commercial customer is really moving forward as quickly as retail?

I'd start with Matt, I don't think what happens in the market has a big determinant on our success when we have just over 1% market share.

I think it's more about what are we doing in that business.

We control our destiny completely.

As far as the control stores, I want to be careful about that because they are not technically control stores.

They are still getting enhancements in technology, enhancement in product offerings.

They just don't have the outside sales representation, incentive compensation and a couple other minor things.

Got you.

But I think the bottom line is we're going to determine how we do in commercial.

And then finally, can you just kindly remind us of the timing of the loss of that significant customer and whether that was all in a single quarter or whether that was a gradual dynamic?

It was a gradual dynamic.

Actually, the largest amount of business that we did against them was in the third quarter of last year, so we have begun ramping down against that.

Now we are still doing business with that customer and still have some of those programs in place, so it will continue to run for roughly a year but the biggest part of it we just overlapped.

And did you ever quantify how big a contributor that was?

I don't believe we did specifically.

Okay.

Thanks so much.

Thank you.

You have a question from John Lawrence of Morgan Keegan.

Your line is open.

Good morning, guys.

Good morning.

Bill, would you comment on the last question regarding or Dan's question about the promotional activity?

Could you give us some sort of next level, how does the Duralast brand impact that promotional schedule and is there a trade down effect into the Duralast brand?

I know it's not at the low end but can you give us some insights there please?

I think to answer that specifically I'd say the Duralast brand doesn't play into that promotional activity per se and we're not seeing a trade down.

I think what we were articulating is that first and foremost, the promotional offerings are the same this quarter as they were last quarter, as they were last year for the most part.

We've seen some increased penetration and activity from consumer behavior standpoint taking advantage of those opportunities to save money and so that's really what we've seen.

Keep in mind again, gross profit is flat with last year and for the year-to-date, it is flat with last year so we're not seeing any unusual fluctuations, we're simply just pointing out some activity to help give you a little bit of color on our gross margin rate overall.

And that assumes some of this additional inventory into these super hubs, a lot of that would be Duralast product?

It would be from the standpoint that we have a lot of hard parts and that's really the point of it, is that we're increasing and improving our coverage significantly in those hub stores and the related satellites.

And that's really our ability to be able to deploy inventory on a smarter basis and we really believe that on long term these hub stores are going to allow us to be able to do that that.

That we'll be able to say yes or a more frequent basis to our customers.

Great.

Congratulations.

Thanks.

Thank you, John.

We have a question from Kate McShane Citi.

Your line is open.

Hi, good morning.

Good morning.

You had mentioned in your comments that you thought it would be more productive for the government to give vouchers for repairs as everyone can't get financing or can afford the new cars with the Cash for Clunkers legislation.

Is this something that you've heard as being discussed as an option?

I don't know that I've heard it discussed as an option coming to us, it's certainly been discussed as an option coming from us and coming from our industry associations, both AAI, and CARE, the coalition for automotive repair equality.

We've made that point very clear.

But as I've said in the comment, it's been interesting to see this initiative more from something that was an environmental protection initiative into a sales stimulus initiative.

And it's hard to fight the sales stimulus if they're trying to stimulate new car sales.

But we believe if you really want to help a broader section of the motoring public, let's give them vouchers so they can take their car to a dealer, to an independent repair shop, to one of our national accounts, or give them a coupon they can bring to AutoZone and do it themselves and save even more.

We've made that point very clear but as I've said in the comment, it's been interesting to see this initiative more from something that was an environmental protection initiative into a sales stimulus initiative, and it's hard to fight the sales stimulus if they're trying to stimulate new car sales.

But we believe if you really want to help a broader section of the motoring public, let's give them vouchers so they can take their care

An even though the AAI's suggestion, does it seem to be gaining traction or do you have any support from anyone yet on the suggestion?

Not particularly at this point in time, but we continue to engage in the discussions and debate.

Okay, great.

Thank you.

Thank you.

We have a question from Scot Ciccarelli, RBC Capital Markets.

Your line is open.

Hi, guys, it's Scot Ciccarelli.

Hi, Scott.

I guess we've seen over the years a long stretch of years gas prices go up and down and we've seen miles driven increase and decrease but it seems to me we really don't have a good historical precedent for the massive drop that we've seen in new car sales.

Can you provide your perspective on how you think this is going to change the basically impact your business over the longer term?

Yes.

I think you make a great point, first, Scot.

And that is that we don't have a great analog to draw back to, but the bottom line is as new car sales go down, the fleet, I don't anticipate the fleet size is going to change so the fleet is going to age.

And so more cars will be out of warranty and we have a better opportunity to participate in the repairs of those vehicles as they come out of warranty.

So we've continued to believe an aging fleet as we've said for many many years is positive and we think it's going to reach close to 10 years when the AAIA comes out in a couple weeks, or months.

But Bill, with all due respect, why wouldn't that increase the historical growth rate of this industry?

It could.

I think it could.

I think that's yet to be seen, Scot.

Okay.

Fair enough.

Thank you.

Let me touch on that for one second if you don't mind.

We plan very conservatively.

We always do.

First of all, we don't have to get out in front of our business to make sure we can provide our customers with great products if our sales accelerate.

So what we don't want to do is get ourselves thinking that we're going to be in this kind of environment for an extended period of time.

It's not necessary for us to effectively manage this business.

All right, that makes sense.

Thank you very much.

We have a question from Colin McGranahan, Sanford Bernstein.

Thank you, good morning.

I think last quarter you said much of the increase in business had come from new customers that hadn't been AutoZone customers in the past.

Wondered if that continued to be the trend as sales accelerated even a little bit further and if you learned anymore from some of the survey work that you've done, on where these customers were coming from.

Are they previously OEM dealer customers that are fixing the cars themselves or are they coming from the independent garage or the independent dealers, etc.?

Well it's always very difficult for us to know specifically all of the customers, clearly our loyalty program allows us to have better insights and we continue to mind that information.

I don't know if we necessarily said that a majority of the customers were new customers last time.

I think what we were alluding to is that given our transaction count and the health of the industry overall that we believe we have an increase in new customers coming into both the industry and specifically coming into AutoZone.

And one of the things we were alluding to and highlighting and I think Bill talked a little bit about on the call, is the importance of our AutoZoners and the training, etc.

, in order for us to provide great trustworthy advice particularly for new people coming into

Okay, great.

Thank you.

Thank you.

Our final question comes from Greg Melik, Morgan Stanley.

Hi, thanks.

I just want to qualify a bit more on the gross margin.

I think in the introductory comments you guys talked about the promotional offerings and some of the pressure there continued but it was unchanged but then you mentioned the penetration had increased.

Could you just explain what that is?

Was that just more SKUs were being promoted?

Not necessarily more SKUs.

What we were saying was that the consumers increasing the penetration of those offerings, so in essence, the promotional calendar that's relatively consistent with the prior years, however the consumers activity was slightly more weighted towards that activity.

And we spent a fair amount of time talking about it on the call so I don't want it to get overplayed.

Again, gross margins relatively flat and we were trying to give you some color on gross margin activity during the quarter and so one of the things that we have seen is just a slight increase in activity, consumer activity related to promotional offerings.

But again, our offerings are relatively consistent year-over-year.

Okay, great.

And there wasn't anything else, the promotions were basically the way they were last year, there was nothing incremental in terms of SKUs?

Exactly right.

So think about it as from the windows signs and circular, etc.

, that activity is the large vast majority of our promotional offerings and that's relatively

And on a second follow-up on SG&a, you talked about the super hub rollout and how that could continue if it keeps going well.

Is there an element to the super hub rollout that is fixed up front, in other words as you add another 5 or 10 or 15 super hubs that the incremental cost is less, or is it pretty much one for one as you do a new hub?

No, I would say that there is some incremental costs as we mentioned.

There's some ongoing payroll and some ongoing delivery costs to operate a super hub but there is a component of that 20 basis points that we highlighted before, that will be one-time.

Okay, great.

Thanks.

Thank you.

Okay, before we conclude the call I'd like to reiterate that we have a solid plan for the future and we're focused on growing all facets of our business.

Our culture remains the key point of differentiation from our competition and I want to stress that our efforts have a long term focus.

We view ourselves as in a marathon and 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 AutoZone will continue to be incredibly successful.

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

That does conclude today's conference.

Thank you for participating.

You may disconnect at this time.