汽車地帶 (AZO) 2010 Q1 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

Please be advised, today's call is being recorded.

(Operator Instructions) This conference call will discuss AutoZone's first 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 / 11 a.m.

Eastern Time.

Before Mr.

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

Certain statements contained in this press release 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 assumption and 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; credit market conditions, the impact of recessionary conditions, competition, product demand, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, energy prices, war and the profit of war, including terrorist activity, availability of consumer transportation, construction delays, access to available and feasible financing and changes in laws or regulations.

Certain of these risks are discussed in more detailed in the risk factors section contained in Item 1A under Part 1 of our annual report on Form 10-K, for the year-ended August 29, 2009 and these risk factors should be ready carefully.

Mr.

Rhodes, you may now begin.

Good morning and thank you for joining us today for AutoZone's fiscal 2010 first-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 first 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.

We are very pleased to announce for the quarter a same-store sales increase of 5.6% and an EPS increase of 26.4%.

This past quarter, we continued our relentless focus on executing the basics, as we believe this translates to a superior customer experience.

I'd like to personally thank and congratulate our 60,000 plus AutoZoners across North America for their tremendous dedication and commitment to excellence that lead to us achieving our 13th consecutive quarter of double digit EPS growth.

During that time period, we have experienced highs and lows from a macroeconomic perspective.

Yet, what remained consistent was our ability to deliver double digit EPS growth.

I think this points to the resilience of our organization to manage our business successfully, from a financial perspective, while continuing to deliver a superior shopping experience.

As I reflect on the past 12 months, I recall fielding questions about what would happen if the financial system stopped working, as it pretty much had, and how would we be able to conduct our business?

The questions were around the health of our vendors and what would happen if banks continued to tighten credit?

While we hope the worst is behind us, the economy is still not perfect.

It goes without saying, there are too many people out of work for things to be back to normal.

However, we believe our industry and, more specifically, our Company, can perform well in virtually all macroeconomic cycles, as evidenced by our performance during the boom and bust cycles of the past three years, where we delivered double digit EPS growth in every single quarter.

As we look forward, we continue to be optimistic regarding our sales potential.

We worked tirelessly in 2009 to make sure our stores looked great.

We expanded our parts coverage and improved our AutoZoners' ability to say "yes" more frequently.

We substantially improved our hub store operating model and we expanded and improved our commercial sales force.

These initiatives have allowed us to be prepared for this year.

We expect that many of you will be focused on future quarters, as we begin to anniversary tougher comparisons from a same-store sales perspective.

While we don't have a crystal ball into the future, we believe in general, there is not a whole lot different with our customer today than there was two or three quarters ago.

Nor do we anticipate significant changes over the next few quarters.

The macro challenges remain a head wind for our customers.

There is no doubt the financial challenges facing our customers have driven a general sales improvement for our industry.

However, and importantly, we believe the initiatives we've put in place surrounding our hub store enhancements, hard parts additions, especially our late model coverage, our leadership training for our store managers, enhancements to our Z-Net system and our store refresh efforts have contributed to our increase in market share.

We believe these initiatives are building momentum in our business.

I also want to point out the success we're seeing across our commercial business.

This quarter marks the 10th consecutive quarter of sales growth.

We are pleased with the gradual acceleration that we are seeing, as our commercial business grew 7.7% this quarter, a nice acceleration from just the last quarter.

While sales increased sequentially from our 5.7% increase in Q4, excluding the 17th week, an outsized percentage of our growth was driven by our up and down the street customers.

These smaller, usually independent, garages showed double digit improvement for the quarter.

And we feel the enhancements we have made with this customer segment translates well to all customer segments.

Additionally, I would like to congratulate the organization for delivering another strong performance regarding return on invested capital, as we were able to grow this metric to 24.9% on a trailing four-quarter basis.

During 2009, we made substantial investments in our business, both operating expense investments and investments of capital, working capital and capital expenditures to strengthen our position in the marketplace.

We are pleased with the performance in most of our metrics but our performance in return on invested capital has been especially strong.

Return on invested capital is one of our key performance metrics, as it highlights the efficiency with which we allocate your capital.

We always maintain our diligence regarding capital stewardship.

As we begin the second quarter of our fiscal 2010, we feel we're well positioned to take advantage of continuing growth opportunities that exist in each of our four businesses; US retail, commercial, Mexico and ALLDATA.

I'd also like to mention that this past quarter, we held our national sales meeting here in Memphis.

It's a very exciting event, as we invite over 2,000 AutoZoners from across the country to celebrate our successes and challenge our leadership to improve in specific areas heading into the New Year.

Our theme for the new fiscal year was launched at the time, "going the extra mile." We've stressed that exceeding our customers' expectations is what our Company is all about.

It's what our founding principles were built on.

We also focused our time on discussing our initiatives to provide the best service levels, sell the complete job and continue to expand our product knowledge to support our customers' needs.

What is personally my favorite part of a three-day event is our President's Club luncheon.

We invite the best store managers, representatives of stores across the US, to an afternoon meeting to share their ideas and opinions on how we can operate better.

It's always impressive how many of our best ideas come from our store leadership.

This year was certainly no exception.

From ideas around being more environmentally conscience, to reducing tender type fees, to streamlining our return processes, to delivering parts on a more timely basis through our hub store model, we routinely learn an extraordinary amount from our AutoZoners who are on the front lines serving our customers every day.

That's why our executive team spends a considerable amount of time in our stores.

We have to execute better than our competition.

We have to stay focused on winning because our customers do shop our competitors' stores.

We have to gain our share of their spending dollars.

In fact, we need to gain our competitors' share, as well.

Now, I will discuss our quarterly performance in a little more detail and try to address questions you may have.

I know that many of you are looking forward to the next few quarters as we approach tougher comparisons.

As I said earlier we do not have a crystal ball into the future.

However, we believe that through our ongoing initiatives, we are improving our execution and delivering a superior customer experience.

We will continue to invest in these initiatives, as we believe they have contributed to our ability to increase market share over the past few quarters.

At the same time, we do not see anything at the moment that will materially change for our customers.

It will remain important for them to maintain their cars in the most cost effective manner, whether that be through one of our trusted commercial customers or by doing it themselves.

From a merchandise perspective, as we've discussed last quarter, the categories we define as maintenance and failure are definitely growing at a faster rate than discretionary categories.

In fact, discretionary purchases were at the lowest percentage of our sales mix this past quarter versus any of the previous three quarters.

To level set, discretionary spending represents approximately 15% of our store sales.

While these goods do carry a high margin, they are not as high as our failure categories.

We continue to plan these categories to be challenged, heading into the New Year, as customers remain cautious with their purchases of discretionary products.

Overall, our gross margin rate remained healthy and showed improvement this quarter.

Although our merchandise sales mix was similar to previous quarters, we were pleased to report an improvement in the margin rate versus last year.

While we foresee some pressure on commodity pricing, we feel our ongoing efforts to reduce costs across all merchandise categories are leading to a general belief that we can expand margins heading into the balance of the year.

While certainly, in any one quarter, we can have fluctuating results, we believe our gross margin rate is biased to the upside.

In addition, we continue to leverage our distribution expenses, which have benefited our gross margins.

Finally, regarding pricing to our customers, it has not been a material story for us.

From an expense standpoint, as mentioned earlier, we continued to accelerate some of the initiatives that we have been testing, faster than we may have otherwise in an effort to capitalize on the current market conditions.

We believe this has been the right approach and has contributed to our sales momentum.

That being said, our organization knows how to manage expenses.

If the sales environment warrants a change, we stand ready, willing and able to quickly make any necessary adjustments to this approach.

Regarding our commercial business, our trends remain positive as we continue to build our internal sales force, refine our parts assortment and focus our efforts on our most profitable customers.

With over 7% growth this past quarter, we look forward to this business continuing to accelerate towards a double digit growth rate.

While this may be a long-term goal, our short-term objective is to continue on our steady upward trajectory and build on the momentum we've gained with our customers and the confidence they have in us.

We recognize, that with only a 1.5% market share, there is a significant opportunity for growth and we are encouraged but not satisfied, never satisfied, with our current performance levels.

We continue to feel confident in our strategy and we look forward to capitalizing on this tremendous opportunity in 2010 and beyond.

Now, I'll take a few moments to talk more specifically about our retail, commercial and Mexico results for the quarter.

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

For the quarter, total auto parts sales increased 7.7% versus 1.4% during last year's first quarter.

This segmentation includes both our domestic and Mexico stores.

Mexico, unfortunately, reported much slower growth on the quarter, as the Peso exchange rate continued to reflect a material headwind on a year-over-year basis.

Focusing first on our domestic business, during the first quarter, we continued to focus on driving sales and profits through improving the customer experience.

This quarter, we updated 19 of our 40 plus major merchandise categories and remained focused on completing at least one line review per major category annually.

Our vendors have worked diligently with us to refine our merchandise assortment as a core element of improving our ability to say yes more frequently to our customers, particularly by adding late model coverage.

Inventory proliferation remains a common theme for our industry and we remain committed to the timely execution of merchandise assortment updates.

This allows us to respond to product life cycles on a timely basis.

I'll break my comments regarding retail sales up into major categories.

Specifically, I'll address what we're seeing from a merchandise sales perspective but helping to drive our performance.

Then I'll touch on our new hub store operating model.

Third, we'll touch on our [Witiger] meeting, completed this past quarter.

Fourth, I'll spend a moment on our marketing themes for our customers, slated for 2010.

And finally, I'll address the macro trends we've seen.

Regarding merchandise mix, we experienced trends that were generally consistent with the prior two or three quarters.

We continue to see items categorized as maintenance outpace the growth in the discretionary categories.

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

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.

For the quarter, failure-type items represented approximately 45% of our sales.

Representing the largest percentage of our sales.

As parts failed based on relatively predictable timeliness, we wouldn't expect to see the economy as a major contributor to failure rates.

Also, as previously mentioned, 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 from the economy, they have elected to defer more of these types of purchases.

Discretionary purchases represented, as I've said before, approximately 15% of our customers' purchases during the first quarter.

We expect this trend will continue, as consumers remain challenged by the macro environment.

Next, I'd like to take a moment to update everyone on our enhanced hub concept.

We converted an additional 11 hub stores during the first quarter to our new model by increasing the frequency of delivery to our satellite stores and refining the hard parts assortment.

To date, we've converted 71 of our 143 hubs to this new operating model.

The results, primarily measured by a sales lift in the combined store market, have been encouraging and sufficient for us to continue to expand the number of locations on the programs.

By increasing the frequency of deliveries to our satellite stores and increasing hard parts assortment, our AutoZoners are now in a position to say yes with confidence, more frequently and better than ever.

Secondly, the enhanced hub offers us the ability to improve the productivity of inventory, particularly slower moving inventory.

We no longer have to retain certain slower moving products in each of our satellite stores because we can now access the slower turning SKU's from our hub stores, thereby reducing working capital.

Currently, we're redeploying these inventory investments to add more late-model products.

As this is a relatively new initiative for us, we will continue to look for opportunities to refine and expand this service.

And we believe this enhancement offers us opportunities to continually, profitably increase our sales.

Third, training continues to be a key priority to improve customer service and increase sales.

This past quarter, we continued to invest in our Witiger meetings across our entire chain.

These Witiger meetings are store level meetings with all store AutoZoners.

The themes for this quarter highlighted the key items discussed at our national sales meeting.

Our AutoZoners really embraced this year's message, as we heard more great stories regarding customer service than we've heard in a long time.

I personally attended one of the sessions in Cincinnati and the group was very engaged and asked some great and insightful questions.

By taking the time to make sure our store AutoZoners understand our plan, we're strengthening their commitment to those plans and therefore, improving our service to our customers.

The fourth item I'd like to talk about is our marketing messages for our customers in 2010.

The goal in 2010 is to learn even more about our customer base.

We have and will continue to spend a great deal of time listening to our customers through our customer satisfaction surveys and intensely monitoring their purchase behaviors to gain more insights on how we can serve them better.

We have started experimenting with segmenting our marketing messages to different customer sets.

We need to make sure we are communicating our complete value proposition to a wide range of customers or more importantly, a specific value proposition to a specific customer.

We have begun to set different merchandising assortments on our sales floor to more effectively serve the particular customer needs of that type of store.

As this micro merchandising initiative is in its infancy, we will update you on these efforts as we progress.

Secondly, there will be more focus on new media, search and display on the Internet.

And third, we will remain heavily focused on radio advertising, as we are one of the largest radio advertisers in the US today.

Understanding the customer is key to our business and we are relentless at continuing to learn more about our customers and leverage those learnings to enhance their experience with us.

Now, let's turn to macro trends.

During the fourth quarter, unleaded gas prices started out at $2.61 a gallon and remained relatively static, finishing at $2.64 per gallon on the last week of our quarter.

We believe gas prices have not been a material story to our sales results over the last quarter but we must remain mindful of the price decline we saw last year this time.

Last year's first quarter ended at $1.89 a gallon, as prices declined from the mid $3-gallon range at the beginning of the quarter.

Future prices on unleaded gasoline indicate normal seasonal pricing, with no spikes assumed for the foreseeable future.

Regarding miles driven, we saw real improvement for July, August, and September.

However, we expected these increases as gas prices stabilized and the comparisons became easier.

While recently, we have seen minimal correlation in our sales performance with miles driven, historically, it has been one of the two key statistics which correlate to our sales results better than anything else over the long term.

The other is the number of seven-year-old and older vehicles on the road, which continues to trend in our industry's favor.

Regarding weather, we believe it had a slightly negative impact on our results, especially in the Northeastern and Midwestern states due to cooler weather this year versus last.

For the trailing four quarters, total auto parts sales per square foot were $241.

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 7.7%.

We are encouraged by the momentum we have experienced in this business over the last year, and we believe we're positioned well for continued growth in 2010 and beyond.

As we analyzed our commercial sales growth across the country, we were pleased to see growth has come from both existing and new customers.

As we continue to increase market share, we've grown our sales force and improved our parts offering.

With improved tools in place, combined with constant enhancements, we're continuing to build a platform for long-term growth.

We now have our commercial program in 2,312 stores, supported by 143 hub stores.

During the quarter, we opened nine additional programs.

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

We are targeting sales growth through; first, increased penetration of existing customers.

And second, on acquisition of new customers in our existing service radius.

The majority of our business is derived from up and down the street customers, which experienced double digit growth during the quarter.

We've continued to work closely with our national account customers and have developed a strong business relationship with many of these customers.

Also, we've continued 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 the other segments.

Over the previous quarter, with the success we were seeing, we added to our commercial sales staff.

This past quarter, we've watched and learned from these additional AutoZoners.

An external sales force is an important component of our selling proposition.

However, we remain committed to growing this business profitably and are constantly ensuring that our investments are resulting in improved sales and profitability.

This past quarter, we were successful in growing both our operating margin and operating dollars for commercial business.

We continue to believe more intense personal focus on existing account management will drive continued improved results.

We also continued to see opportunities to leverage technology as a point of differentiation in this business.

Our new sales force management tool, which allows us to direct our sales force to specific accounts and provides us with meaningful data on the outcome of those sales calls, continues to help us target our sales efforts effectively.

Lastly, I'll mention again our one team concept that's being tested in a few locations.

We believe we have to stop referring to AutoZoners as either retail AutoZoners or commercial AutoZoners.

Our goal is for our AutoZoners to support both sides of the business.

We're looking to simplify our systems across both businesses as well.

We believe this has the potential of continuing -- of utilizing our store labor hours more effectively, thereby garnering better coverage and support of both types of customers.

As this remains in test stage, we'll keep you abreast of our findings.

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 the second fiscal quarter of 2010.

Now, let's turn to Mexico.

Our Mexico stores continued to be challenged by the weak Mexican peso exchange rate.

The peso remains at approximately 13:1 US dollars.

This weakness has challenged the US dollar compares for both the top and bottom lines versus last year.

We opened five new stores during the first quarter and currently, have 193 stores in Mexico.

While exchange rates have hindered our results in the short-term, we continue to see our business model perform well in Mexico and we remain committed to growing this business and will continue to grow our store count, on a percentage basis, generally consistent with the last couple of years.

We believe that we have an appropriate strategy to manage our Mexico business for the long term, 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 the balance sheet.

Bill?

Thanks, Bill.

Regarding the first quarter, for the 12 weeks ended November 21, we reported sales of $1.589 billion, an increase of 7.5% from last year's first quarter.

Same-store sales, or sales for stores open more than one year, were up 5.6% for the quarter.

We experienced sales growth from both our retail and commercial customers.

Additionally, our sales trends throughout the quarter remained generally consistent.

Over the quarter, there were no material regional sales differences other than the weather impacts previously mentioned.

Net income for the quarter was $143 million, an increase of 9.1% versus last year's first quarter and diluted earnings per share increased 26.4% to $2.82, from $2.23 in the year-ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 24.9%.

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

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

We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital.

We 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 50.3% of sales, up 20 basis points compared to last year's first quarter.

In the first quarter, gross margin was primarily impacted positively by leverage on distribution costs due to improved efficiencies and lower fuel cost.

While we have not seen a material shift down to our good categories from our better and best categories, as the economy weakened, we have seen a move to maintenance categories over more discretionary merchandise categories.

Commodity related categories continued to be strong growers for our business and they typically have lower gross margins than hard parts in discretionary categories.

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.

We continue to spend marketing dollars to promote our brands, as we feel they can create real competitive advantages for us on an ongoing basis.

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

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

SG&A for the quarter was 33.9% of sales, down 5 basis points from last year's first quarter.

This quarter's results included an increase in pension expense of approximately $2.8 million or 18 basis points, which reflects the decline in value of the underlying assets of the plan.

It is our expectation that we will incur a similar expense increase in each quarter for the remainder of the year.

Additionally, we experienced leverage across many operating expenses due to the higher sales volumes.

However, as Bill previously mentioned, we accelerated some of our other initiatives that offset a significant amount of this leverage.

And we also experienced slightly higher occupancy costs from a greater percentage of our new stores being leased.

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

While Bill mentioned this previously, we're excited about our selling opportunities in 2010.

And we should stress, we feel very comfortable in being able to manage our expense structure in all types of selling environments.

EBIT for the quarter was $260 million, up 9.2% over last year's first quarter.

Our EBIT margin improved 25 basis points versus the previous year's first quarter.

Interest expense for the quarter was $36.3 million, compared with $31.2 million in Q1 of a year ago, a 16.6% increase.

Much of this increase was due to a combination of increasing our debt outstanding by 20% versus last year, as well as the additional costs associated with our new three-year revolving credit facility, offset by lower short-term interest rates.

We would expect this higher interest expense run rate to continue for the balance of the fiscal year.

Debt outstanding at the end of the quarter was $2.7 billion or approximately $470 million more than last year's balance of $2.268 billion.

Our adjusted debt levels, at 2.5 times EBITDAR, is in line with the past quarter's results.

As we had previously stated, our objective is to manage our debt levels to maintain our investment grade debt rating.

And at 2.5 times adjusted debt to EBITDAR, we feel comfortable in our abilities to adhere to that goal over time.

However, it is our expectation that, in any given quarter, this may increase or decrease based on our management's opinion regarding market conditions.

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 36.1%, slightly lower than last year's first quarter.

For the second quarter, we expect to run a higher rate, closer to 37%.

Net income for the quarter of $143 million, was up 9.1% versus the prior year's first quarter.

Our diluted share count of 50.8 million was down approximately 14% from last year.

The combination of these factors drove earnings per share for the quarter to $2.82, up 26.4% over the prior year's first quarter.

Relating to the cash flow statement, in the first quarter, we generated $231 million of operating cash flow.

We continue to see opportunities to increase operating cash flow going forward.

We repurchased $204 million of AutoZone stock and at the end of the first quarter, we had $105 million remaining under our share buyback authorization.

We continue to view our share repurchase program as an attractive capital deployment strategy.

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 $2.3 billion, up 3.5% versus the Q1 ending balance last year.

On a per-store basis, we were down about 80 basis points at $508,000.

We believe our enhanced hub model will allow us to continue to manage our inventory levels more efficiently.

We do, however, expect to offset some of these inventory reductions with new hard parts coverage.

Accounts payable, as a percent of gross inventory, finished the quarter at 96.7% versus 91.6% in last year's first quarter.

In fact, this ratio of over 96% is the highest ratio we've ever reported in any quarter at AutoZone.

This increase helped our operating cash flow on the quarter.

For the quarter, total working capital was a negative $186 million versus last year's balance of a negative $66 million.

Net fixed assets were up 4.5% versus last year.

Capital expenditures for the quarter totaled $53 million and reflect the additional expenditures required to open 44 new stores this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters.

Specifically related to new store openings, our new stores remain on track.

And we continue to see opportunity to open domestic stores at a low to mid single digit growth rate for the foreseeable future.

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

We opened 36 net new domestic stores in the quarter, for a total of 4,265 stores in 48 states, the District of Columbia and Puerto Rico.

Depreciation totaled $42.6 million for the quarter, higher than last year's first-quarter expense of $40.2 million due primarily to higher capital expenditures for new stores during this past year.

AutoZone continues to be one of the few players in our industry to have investment-grade debt ratings.

Our senior unsecured debt ratings from Standard & 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 B2.

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.

We have a lot of exciting initiatives, as previously discussed, for the remainder of the fiscal year.

Each one of these initiatives is expected to profitably increase sales.

In no particular order, we will focus on.

Number one, relentlessly hiring, retaining and training our AutoZoners to make sure we're delivering on our stated corporate goal of providing the best in trustworthy advice.

Secondly, continually refining our product assortment in order to meet all of our customers' needs, DIY and DIFM.

Deploy inventory appropriately across our network, with specific emphasis on utilizing our hub and satellite network of stores.

Fourth, commercial sales growth.

With a pay as you go mentality, improving our business with up and down the street, national account and public sector customers.

We will continue to develop our sales team in order to make this happen.

Finally, we'll continue to test our blended concept, our one team initiative.

We believe there can be real power in managing our stores as one cohesive unit.

This will only strengthen our service levels to all of our customers.

While these key priorities highlight some of our key priorities for the year, the most important message for you today is that we're on track, if not a bit ahead, of our plans for the year and we're moving solidly forward.

We had another very good quarter, which again, is worthy of congratulating our entire organization for their commitment to living the pledge.

Our approach remains consistent.

We're focused on going the extra mile in 2010 and we are very well positioned to do just that.

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

Thank you.

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

Your line is open.

Good morning.

Wanted to focus first on expenses.

If I look at the $539 million of expenses in the first quarter, compared to the $503 million a year ago, so a $36 million increase.

Is there any way you can help break out what some of the dollar values might have been associated with the incremental investment in hub stores, training, accelerated maintenance, etc?

Obviously, I think you've mentioned you're using this robust growth environment to reinvest and I'm just trying to get a handle on the actual quantification of what some of that might be.

Yes, I'd probably articulate it as hubs and pension and training, if you want to begin to prioritize it from a dollar standpoint.

Also, keep in mind that, some of that increase in SG&A is in support in new stores and overall sales growth because obviously, we're spending payroll into those sales dollars as well.

And so, I know you're focused on SG&A.

I think as we look forward on it, we believe that the investments that we've made are really beginning to build some momentum and have really been quite attributable to some of the positive results that we've had.

And again, as Bill and I've pointed out before, we feel very confident in our ability to manage our expense structure on a go forward basis.

And we'll do it appropriately based on our sales trends.

Okay and just to follow-up on that, so if the dollar has grown at essentially the rate of footage, it would have been like $527 million.

So of their incremental, let's say $12 million, would it be fair to say 50% of that just went to increased labor, given the increased sales in the stores and maybe the other 50% went to planned reinvestments that you won't be doing let's say a year from now?

I think that's a fair way to look at it, Colin.

I don't want to get into specific numbers but I think that's probably a fair way to look at it.

Okay.

And then, just a second question.

Obviously, I understand you don't have a crystal ball and none of us do either.

But as you think about the two year compares, the two year average trends or the two year sales trends and what we saw here in the first quarter.

That would seem to imply that, as you come up against the second quarter compare, you might be looking at negative comp trends.

Is that within your realm of what you think is a possible outcome?

Or do you think the initiatives put in place, combined with an increasing miles driven environment and continued benefits from dealer closings and trade down etc, do you think that you can maintain a positive comp for the next couple quarters?

Now, Colin, you know we're not going to answer that one specifically but I'll give you some color.

Two year trends are one thing.

Three year trends, three year comps are another, and they tell different stories.

What I will say is we've done a lot of things over the last year to really improve the operations of our business, both in DIY and in commercial.

And one of the things that we've been very focused on is, how are we doing in market share?

And we continue to grow market share on both sides of the business.

Over the last year, we've certainly had industry tail winds.

Three years before that, it's arguable we had industry headwinds.

I don't know what's going to happen over the next 12 months.

And you know, I don't need to be that focused on it because we can react to changes in our business in a very short period of time.

And so, I just don't know what's going to happen.

What I know is going to happen is, over the long term, we're going to be incredibly successful.

We have great initiatives in place.

We see where they're helping us grow market share and we're going to stick with them.

Okay, best of luck.

Thank you, Colin.

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

Your line is open.

Thank you.

A couple of questions if I may for Bill Rhodes.

Bill, you mentioned that you've now converted 71 of your 143 hubs, which is exactly 50% and that you are seeing a sales lift as you convert the units.

Can you maybe provide some color as to how much of a sales lift you're seeing in the converted hubs and how has that progression been?

I don't think we're going to call out particularly how well they've done.

But I will say that even the stores that we converted last year continued to grow.

So, it's not a one-time pop and we're continuing to refine that hub store model.

As we do at AutoZone, we're methodically rolling it out.

We didn't run out and roll it out to all of the stores but we continue to roll it out.

And I will say that we have plans to roll out additional stores during this quarter.

So, we see where it's providing us good sales lifts over our return hurdles of 15% IRR's.

And we are very excited about what that initiative has done for us, on both the DIY and the commercial business.

I think a lot of people think it's just a commercial play but when you have 85% of your business in retail, one of the things we always see is, when we do things like that, we get tremendous benefits in retail as well.

Bill, would it be reasonable for us to expect that the sales lift you're seeing though is over and above the corporate average?

Oh, absolutely.

Okay, and then one last question, if I may.

What was the revenues for Mexico in local currencies?

We haven't broken that out, Alan.

Okay, thanks, Bill.

Thank you.

Our next question comes from John Lawrence, Morgan Keegan.

Your line is open.

Good morning, guys.

Good morning.

Bill, would you comment a little bit on the improvement in commercial and some of the up and down the street, you talked about double digit increases?

As you look back to the development of those relationships, what would you point to the -- is most of it related to inventory?

I know you've done some systems work and some other things.

Can you point to some of those successes that's lead to that?

Yes, it's a great question, John.

I think it's across-the-board and I don't think that there's one single initiative that's driven it.

The one we've really been focused on, over the last 12 months in particular, is creating what we call this world class sales force.

And I'm very pleased with how Larry Roesel and his team have been really working hard on kind of engineering approach to how we make sales calls.

And as I mentioned, we rolled out a sales force automation tool, back in the early part of the summer, that allows us to send our commercial outside sales folks directly to the specific accounts.

And we're seeing benefits from that but we continue to work on the systems front.

We continue to work on improved parts coverage and really excited to see the momentum.

The one thing we didn't call out is, one of the reasons our sales growth is improving is because we're beginning to lap that customer loss that we had last year.

And that's why we're calling out, specifically, the up and down the street business.

That's really a good indication of how our overall business is trending in the commercial business.

And it's been doing well for a while but continues to accelerate that growth rate.

And secondly, can you comment a little bit on Duralast product development, how many SKU's, what part of the business is it and are we still seeing growth in that mix?

Yes, Duralast and Duralast Gold and some other products of our brands all continue to grow.

They've been well received.

They continue to grow in both the DIY and DIFM side of the business.

There haven't been significant category conversions to Duralast because we've done most of those categories but they continue to gain traction.

Great, thanks.

Thank you.

We have a question from Dan Wewer, Raymond James.

Your line is open.

Yes, thanks.

In the release, you noted that the lower fuel cost was benefiting cost of goods sold.

And of course, going forward, we're reaching the anniversary of that.

You're sounding very positive on gross margin rates for the balance of the year.

I was curious, is it the fact that you're lapping the loss of CarMax from a year ago and replacing it with these down the street commercial customers?

And I'm assuming that's a mix -- a better margin business.

Is that the key reason for the optimism on the margin rate going forward or are there some other catalysts in place in cost of goods sold that could begin to kick in?

Yes, I wouldn't say that that's a key reason.

I think that we got some benefits this quarter from supply chain efficiencies.

I think, as we look out, our gross margin from a product standpoint continues to remain very healthy.

And so, we see continued opportunities, we've articulated in the past, between lower acquisition costs and just managing category penetrations and offerings.

And as we look through that, we believe that, again, our margin remains fairly healthy.

It was healthy this quarter and we expect it to have a little bit of improvement as we go forward.

And I think the other thing, Dan, and we called it out in our prepared comment, we think our gross margin rate is biased to the upside.

And I think that's to Bill's point on the product side, as well as the distribution side.

And I would like to call out, Bill Graves and his supply chain team continue to do a fantastic job.

And all of those benefits didn't come from fuel; they also came from efficiencies in our supply chain.

And one follow-up question if I could.

On the SG&A growth in future periods, you noted that you could cut back, the reinvestment rate of same-store sales did slow.

And just trying to get a better understanding and perhaps following up on Colin's question earlier, what would the items that you would begin to cut back on reinvestment if same-store sales were up 1% or 2% instead of 6%?

I think you're going to look at basically payroll levels overall, to some extent.

We're going to be able to support our customer service levels at appropriate levels based on sales trends.

I think that the rate of investments that we've made over the past can be moderated based on what we're seeing from our sales projections.

Again, we're going to make investments that we believe are paying us back from a sales perspective.

And if we don't see that payback, if something were to change, then we're going to make altercations to the investments that we've made to compensate for that.

But I think overall, the organization has had a pretty good track record of being able to control variable components of the expense structure fairly quickly in response to sales trends.

So, we feel pretty nimble about it and we feel pretty confident about the investments that we've made up to this point and the contributions that they're making to our sales trends.

Okay, great, thank you.

Thank you.

Our next question comes from Gary Balter, Credit Suisse.

Your line is open.

Hello?

Gary Balter, go ahead, sir.

Sounds like we lost him.

We have a question from Tony Cristello, BB&T.

Your line is open, sir.

Great, thank you.

Good morning, gentlemen.

Good morning.

One question I wanted to ask a little bit about is the hub concept and I know you talked about a little bit in your prepared remarks and in some Q&A.

But when you look at this 70 locations or so that you've converted to date, is there a geography difference in the ones you went about saying, hey, the first 50% are going to be the ones that are located more toward the up and down the street, toward the commercial customer, toward where we think we can get the bigger lift?

And the balance of the 70 or so that are left are ones that are more in a DIY-oriented market or is that not the approach you took?

Yes, I don't think that that's the approach that we took.

There were several factors.

Number one, was where did we have the space?

Because it takes a lot more space to do it.

So, where were the locations where it made the most sense from space?

I will say that we did lean towards the West Coast because the competitive environment on the West Coast is changing and we wanted to make sure that we were -- absolutely had our best foot forward.

Okay.

And when you looked, then, at the stores that are associated with some of these converted hubs, have the planograms or the inventory stocks that you've done in those stores themselves changed?

If we were to walk in those stores, would they be different today than they were 12 months ago before they associated with that converted hub?

What you would be able to see on the sales floor would not have changed at all, Tony.

Now, remember and we've previously talked about some micro merchandising initiatives but those are not related at all to the hub stores.

So, the sales force sets are exactly the same as they would have been.

Now, the hard part sets are changing over time and that's what we've talked about.

We're able to take some of the slowest of the slow moving SKU's out of those satellite stores because we can get them to their neighboring -- we can get them from the hub store three times a day.

So, we don't have to have it sitting on the shelf.

And that's been able to help us lower our inventory rates.

And our plan is that that will help us over the long term lower inventory rates, but right now, we're primarily reinvesting those dollars into increased coverage in the hub stores themselves.

When you look at a hub store today, if you took the number of hub stores in total and averaged it out across your domestic store base and maybe you'd have 30 stores per every hub store, is that the same ratio that the converted hubs are servicing as well or is it different in --?

Well it's not terribly different but the one thing that's changed over the last six months or so is we've also increased the amount of stores that are serviced by the hub stores by providing what we call a courier service.

So stores that are outside of our typical hub network are now, in a lot of cases, getting one-time per day delivery.

So, almost every store in our chain now, maybe except for like 30 or so, are now getting some form of hub service, which has been great for those outlying stores in the rural markets in particular.

And then, I guess you did comment about adding some staffing for the commercial side of the business.

Was that totally external sales or have you done some kind of commercial staffing in the stores as well to supplement?

We're always coming in and out with commercial staff based upon the volumes in those stores but there's been no structural change in the internal store structure.

What we're primarily talking about was our outside sales folks or territory sales managers, as we call them.

So, how many do you have today versus say 12 months ago?

We're up over 200 now.

When we came into 2009, we were substantially below 150.

Okay, great.

Thank you, guys.

I appreciate it.

Thank you.

Our next question comes from Greg Melich, Morgan Stanley.

Your line is open.

Hi, thanks.

Two questions.

One is, could you guys give us a sense of the traffic and the ticket in the quarter and how that's been trending?

And then, a follow-up to that as well.

Yes, we've actually historically had always had strong ticket and our traffic had usually been negative to slightly flat.

But over the past year and this past quarter, we've seen positive out of both.

So both actually drove it and I would say that our ticket was probably a little bit heavier than traffic.

But overall, both drove it pretty positively.

But the material change that we've seen over the last year has been traffic.

Yes, traffic has really been the biggest change and that's been the biggest driver.

The positive aspects of the ticket have been relatively constant; it's been the change in the traffic.

And that's what we believe is leading to our increasing capturing of market share.

And about a year ago, was that when we had the big acceleration in comps earlier this year, that was driven by more traffic than ticket?

That's correct.

Great.

And then, second, is I noticed the ALLDATA and other business looked like it slowed a little bit.

It was still up but only up 0.9%.

Was there anything going on in there in terms of timing?

It just seems that with the commercial business doing well and with more service business going on and some of these dealers probably having moved from new car dealerships to independents, that there would have been some more growth there.

Remember, that is ALLDATA and the eCommerce business as well.

Clearly, ALLDATA has a tremendous amount of market share and there have been contractions in the number of independent dealerships and also, ALLDATA sales into dealerships.

Some dealerships that work on multiple makes and models.

So, it's been somewhat challenging but they've done a fabulous job over a very long period of time and we're very bullish about their future as well.

Okay.

So, it's not a price issue or anything like that, it's just the number of units?

Correct.

Great.

Our next question comes from Matt Fassler with Goldman Sachs.

Your line is open.

Hi, this is actually Mark filling in for Matt.

First question was regarding market share gain, you talked about, in commercial and DIY.

I was just wondering if you could talk about what you're seeing from the competitors on that front?

And then, the follow-up would be, on the record payables ratio, could you talk about what has been the driver of that and how should we think about it going forward?

Thank you.

I'll start with your second one first.

On the drivers of it, one of the things that's happened in the last 12 months, is over a long period of time, we've had deteriorating inventory turns.

And over the last 12 months, we've been able to stabilize that and in fact, grow it ever so slightly, which has been very encouraging.

And our merchandising team continues to work very well with our vendors and finds opportunities for us to extend our terms with those vendors.

So, the combination of those two factors lead us to an all-time high and nearing our goal of 100%.

On the market share front, what I will say is we continue to see market share gains in DIY and DIFM.

We continue to see them across all of the major geographic areas.

They've been relatively consistent across all the major geographic areas and we're growing it in each one of those areas in each business.

As to what they're doing, we'll let them focus on what they're doing.

We are very confident with our consistent strategy that's focused on improving the customer experience.

Thank you.

Thank you.

We have a question from Michael Lasser from Barclays Capital.

Your line is open.

Good morning.

Thanks a lot for taking my question.

It sounds like you have a big opportunity next year to improve your conversion rate of some of the traffic increases that you've seen last year.

And a lot of the initiatives that you're implementing are focused on that area.

Is that a fair characterization and have you seen anything in the last several weeks to support that belief?

Well, I don't want to get into any last several weeks because we've entered a new quarter now.

We'll stop talking as of the end of the quarter.

I think our organization has done a fantastic job of capitalizing on the increased customer count that we've seen over the last year.

And I think a lot of it has been a result of them giving great service to our customers, both in the store, on the phone, all of the nitty gritty details of running a retail operation.

I think our inventory assortment is so much better than it was three years ago that that's helping drive our improvements.

And then, of course the macro changes, I think, have also made people focus on maintaining their vehicles better.

And then, on the advertising, will some of the changes that you're making this year result in accelerating increases in total ad expenditures and do you view that as a necessity to continue to grow traffic?

We don't.

I think that the advertising expenditure will be relatively consistent to last year.

Our messaging has been fine tuned and it continues to be targeted.

So, we're pretty pleased with our overall marketing program and expect that to continue.

Okay, last question.

The discretionary category moved from under 20% last quarter to 15% of sales this quarter.

I imagine there's some seasonality in that number or otherwise it would suggest that the sales of those products slowed considerably during the period.

So, is that the case?

And if the economy does continue to improve, how do you think about the performance of these items in that scenario?

Yes, I think that's a good way to look at it, is it's more of a seasonal aspect of it.

But look, as the economy improves, we expect that category to probably improve somewhat.

We certainly had a correlation when the economy pulled back a little bit but we continue to execute at a high level across-the-board, particularly on the maintenance and the hard parts and the sale of related items.

Great.

Thanks a lot and good luck.

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

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

We have a solid plan for 2010 and a culture that is second to none but I want to stress that this is a marathon and not a sprint.

Our focus is on our critical success factors.

As we continue to focus on the basics and never take our eye off of optimizing long-term shareholder value, we are highly confident AutoZone will continue to be incredibly successful.

And finally, I'd like to wish our AutoZoners and everyone listening this morning the best during the upcoming holiday season and a very prosperous and happy 2010.

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.