汽車地帶 (AZO) 2010 Q2 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. Be advised today's call is being recorded. (Operator Instructions) This conference call will discuss AutoZone's second quarter financial results. Bill Rhodes, the Company's Chairman, President, and CEO will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 10 A.M central time, 11 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 assumptions and assessments made by our management in light of experience, procession of historical trends, current conditions, expected future developments and other factors 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 prospect of war including terrorist activity, availability of consumer transportation, construction delays, access to available and peaceful financing, and changes in laws or regulations.

Certain of these risks are discussed in more detail in the Risk Factor section contained in item 1A under part one of our annual report on Form 10-K for the year ended August 29, 2009 and these risk factors should be read carefully.

Mr. Rhodes, you may now begin.

Good morning. And thank you for joining us today for AutoZone's fiscal 2010 second quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer, Store Development and IT and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the second quarter I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complimenting our comments today is available on our website, www.autozoneinc..com. Please click on Quarterly Earning Conference Calls to see them.

We are pleased to announce for the quarter an EPS increase of 21.2% and a domestic same store sales increase of 1.0%. We believe the initiatives we put in place surrounding our hub store enhancements, hard parts additions especially our late model coverage, discipline category line reviews, our leadership training of store managers, our ongoing development of an effective commercial sales force, enhancements to our Z-net technology and our store refresh efforts have continued to allow us to grow both our sales volumes and more importantly our market share in both the DIY and Do It For Me segments. Furthermore we believe these initiatives are building momentum in our business.

As we began this quarter, we were cognizant that our comparable sales -- same store sales results would become more challenging. As you recall, it was the second quarter last year when our sales began to increase. While we were cautious going into the quarter about our sales comparisons, not knowing how weather and consumer buying habits would play out, we were confident that the actions and strategies we were implementing would be highly valued by our customers during these challenging times. As we said on our last call, we didn't see anything on the horizon that would cause a material change in consumer buying behavior. Simply put we did not anticipate new car sales, gas prices, or employment statistics to change materially over the last few months, and clearly they have not. Our customers continued to buy products similarly to the previous 12 months. With the economy remaining challenged we continued to expect our customers to look at AutoZone to provide them with all of their vehicle solutions through are offering of high quality products at a good value supported by trustworthy advice.

With respect to the weather, it is fair to say that the weather conditions were more harsh throughout much of the United States in comparison to the prior year. Although cold weather is positive for our business, it remained wet and certainly toward the end of our quarter, much of the country experienced heavier than normal snowfall which in some cases may have impacted customers ability or desire to reach our stores. Having said that, over time, weather averages itself out and we are always going to have some positive or negative effect from the weather. The important factors for us are that we take care of our customers and continue to capture profitable market share.

I want to take a moment to congratulate our AutoZoners on delivering our fifth straight quarter of 20% plus EPS growth and our 14th straight quarter of double digit EPS growth. This long stretch of success can be attributed to a simple and clear strategy of delivering exceptional customer service and trustworthy advice all while continuing to refine our retail, commercial, Mexico, and all-data offerings. These important qualities are embedded in our culture and they are the principles we live by every single day. It is again worth noting that our stretch of 14 straight quarters in double digit EPS growth have occurred in very different macro-economic cycles. Through both boom and bust cycles our organization has performed very well and our Company's financial performance has been quite strong.

I also want to point out the successes we were seeing in our commercial business. This quarter now marks the 11th consecutive quarter of sales growth. We were pleased with the gradual acceleration that we were seeing as our commercial business grew 8.5% this quarter, a sequential improvement from last quarter's 7.7% increase. Our gross was driven primarily by our up and down the street customers. These smaller usually independent garages continued to show double digit sales improvement for the quarter. We feel the progress we have made with this customer segment reflects enhancements we've made to the overall business models and those changes are positively impacting our customers and their purchasing behaviors.

Our improved product offerings and the difference our sales force is making is exciting for our organization. We feel we're very well positioned to further capture market share in this business in future quarters and years. Additionally, I would like to congratulate the organization for delivering another strong performance on return on invested capital as we were able to grow this metric to 25.2% on a trailing fourth quarter basis. It's important to note that during 2009 and continuing for the first half of fiscal 2010 we have 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. During these times of investment, we've expanded our return on invested capital. This gives us great confidence in our planning models to confirm that where we have invested your dollars, we are getting an adequate return. We will always maintain our diligence regarding capital stewardship.

Now I will discuss our quarterly performance in a little more detail and try to address questions you may have. Let me begin by discussing category sales. In recent quarters we provided more detail on the performance of our categories in clusters we have called out as failure, maintenance, and discretionary. In recent quarters our acceleration has come from maintenance and failure categories offset by pressures in discretionary categories. This quarter our performance was more balanced, although our failure related categories were our top performers. From a regional perspective, we did not experience any material changes in sales trends that differed from the overall chain performance. Based on MPD market share we continue to see market share gains in both retail and commercial in virtually every geographic segment. Our competitors, both large and small, continue to be very strong and formidable, and is it incumbent on us to execute at an extremely high level and flawlessly execute our enhancement initiatives to continue to earn these market share gains.

As I mentioned earlier, we have several initiatives underway at various stages but I would like to highlight the performance of our hub store enhancements. Last year we implemented an enhanced model in 60 of our 143 hubs. Through the second quarter, we have completed an additional 22 implementations. This effort includes adding additional inventory and increasing the frequency in reach of our daily deliveries to satellite stores. While this initiative represents a material investment both in terms of operating expenses and some capital, we are quite pleased with the sales performance we were experiencing. The incremental parts additions that are now sold throughout the surrounding satellite stores are both exceeding plan and adding to the overall sales performance of the hub store and its market. With the approximately 60 hubs left to convert, we will manage those rollouts accordingly. We are learning as we go so the remaining rollout schedule will be appropriately paced.

Overall, our gross margin rate remains healthy and showed improvement this last quarter. I would like to congratulate our Merchandising team on their efforts to improve merchandise margins through lower procurement costs, import initiatives and price optimization efforts. We continue to feel margin opportunities exists for us heading into the second half of this fiscal year. I would also like to recognize our organization from our Loss Prevention team to Store Operations, Merchandising, Information Technology, Financing and Supply Chain for their diligence in reducing our shrink expense. They have worked tirelessly to combat this never ending waste and their efforts are beginning to pay off.

From an expense standpoint, while we continue to accelerate some of the initiatives that we have been testing, we also managed our overall expense structure appropriately as sales increases moderated. This organization takes great pride in our discipline approach to managing our cost structure and leveraging our culture of thrift and this quarter's performance further solidifies that this team is highly capable of effectively managing costs. I believe we continue to be well positioned to manage our cost structure for the foreseeable future. As noted previously, but worthy of highlighting again, our commercial business trends remain positive as we continue to build our internal salesforce, refine our parts assortment, and focus our efforts on our most profitable customers. With 8.5% growth this past quarter we expect this business to be a continuing source for sales and earnings growth for many years to come. While we were encouraged by our current performance, we were not satisfied with our current sales levels. We continue to feel confident in our strategy and we look forward to capitalizing on this tremendous opportunity for the remainder of 2010 and beyond.

I would also like to congratulate our Mexico team for opening their 200th store this past quarter. While we have been methodical with this business over the years, it's exciting for our entire organization to reach this important milestone. Congratulations to our entire Mexico team for achieving this important milestone.

Now take a few moments to talk more specifically about our retail, commercial, and Mexico results for the quarter. And then Bill Giles will review gross margin result, operating expense results, balance sheet and cash flows.

For the quarter, total auto parts sales increased 4.1% versus last quarter's 7.7% and last year's second quarter of 8.1%. This segmentation includes both out domestic retail and commercial businesses and our Mexico stores. Mexico's pesos and dollar converted sales were positive for the quarter. The exchange rate was generally neutral this quarter after having been a significant headwind for most of fiscal 2009.

Regarding our domestic business, during the second quarter we continued to focus on driving sales and profits through improving the customer experience. This quarter we updated 14 of our 40 plus major merchandise categories and we remain committed to completing at least one line review per major category on an annual basis. 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 with specific emphasis on adding late model coverage. Parts proliferation continues to present a challenge to our industry, but to combat it appropriately we remain committed to the timely execution of merchandise assortment updates and we will continue to leverage our hub stores to ensure we have the required level of coverage to serve our customers well.

I will break my comments regarding retail sales up into four major categories. Specifically I will address, first, our new hub store operating market -- model, and then we will touch on our best of the best leaders, third, I will spend a moment on our marketing themes slated for 2010, and finally I will address the macro trends we've seen.

Although I have previously mentioned our hub strategy let me take a moment to highlight this quarter's activity. We converted an additional 11 hub stores to our new operating models during the second quarter, increasing frequency of delivery to our satellite stores and refining, or rather increasing the hard parts assortment. Today we converted 82 of our 143 hubs to this new model. Along with our ability to say yes more frequently to our customers, the enhanced hub offers us the ability to improve the productivity of inventory, particularly slow turning 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 skews from hub stores, thereby reducing working capital. Currently we are redeploying these inventory investments to add more late model products. We have plans in place to continue to implement this new model at our remaining hub stores and we continue to refine this relatively new operating model to make it more effective and efficient.

Second, trading continues to be a key priority to improve customer service and increase sales. This past quarter we recognized the best of our commercial and retail AutoZoners with induction into our sales leadership council and we held a celebration to recognize these best of the best performers. We are intensely focused on learning from these peek performers in order to cross pollinate their great ideas and best practices throughout the rest of the organization. Over the long run, it is our culture that differentiates us and positive re-enforcement is a vital element of our culture.

The third item focuses on our customers and in-depth understanding of our customers is critical and we are relentless at continuing to learn more about our customers and leverage those learnings to enhance their experience with us. We are experimenting with segmenting our marketing messages to different customer sets. We need make sure we were communicating our complete value proposition to a wide range of customers while also communicating specific value propositions to specific customers. Secondly, we have increased our focus on search and display initiatives in an effort to exploit the power of the internet. And third, we will remain heavily focused on radio advertising as we were one of the largest radio advertisers in the U.S. today.

Regarding macro-trends, during the second quarter unleaded gas prices started out at $2.64 a gallon and remains static finishing at $2.61 a gallon. We believe gas prices have not been material story to our sales results last quarter, although we are cognizant of the price increases during last years third quarter. Last year's second quarter ended in at $1.96, flat with the year's Q1 prices. However, prices grew starting in Q3 last year up to $2.31 a gallon. Unfortunately, current prices remain above last year's level but they appear to be stable.

Regarding miles driven, we noted improvements for November and December. However, we expected these increases as gas prices stabilized and the comparisons became easier. While recently we have seen minimal correlation and sales performance with miles driven, historically it has been one of the key statistics which correlates to our sales results over the long term. The others 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 negative impact on our results especially last week or so of the fiscal quarter due to heavy snowfall across the country. 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 we will turn to commercial. For the quarter, total commercial sales increased 8.5%. We remain encouraged by the consistent progress we have made demonstrated by the gradual acceleration in our sales performance over the past several quarters. While we have made meaningful progress in building and training a world class sales organization, we recognize that there is still significant work yet to be done to achieve our goals. As we analyze our commercial sales growth across the country, we were pleased to see growth as come from both existing and new customers. As we continue to increase market share, we continue to enhance our selling capabilities and improve our parts offering. With improved tools in place combined with constant enhancements, we are building a platform for long term growth. We now have our commercial program in 2,321 stores, supported by 143 hub stores. During the quarter we opened nine addition programs.

Our main focus remains on building and developing a sales force. Over the last 36 months we built our sales force from basically zero. We are targeting sales growth through first, increased penetration of existing customers, and second, on acquisitions of new customers in our existing service radius.

The majority of our business is derived from up and down the street customers who experienced double digit sales growth during the quarter. Additionally we continue to work closely with our national account customers and have developed a strong business relationship with many of them. We remain committed to growing this business profitably and constantly ensuring that our investments are resulting in improved sales and profitability. This past quarter we were successful in growing both operating margins and dollars for our commercial business. We continue to believe more intense personal focus on existing account management will drive continued improved results.

Lastly we continue to test our One Team concept in a few locations. Our goal is for our store AutoZoners to support both sides of the business. We were looking to create common systems that are intuitive to operate across both businesses. We believe this has the potential of utilizing our store labor hours more effectively, thereby garnering better coverage and support for both types of customers. As this remains in test phase, we won't say much more this morning but are excited about the future potential of this strategy. In summary we remain excited about the growth prospects for our commercial business heading into the third fiscal quarter of 2010 and beyond.

Our Mexico stores performed on -- generally on plan this past quarter. We opened nine new stores during the second quarter and currently have 202 stores in Mexico. Exchange rates did not play a material part in the businesses financial results this past quarter as it did in the second fiscal quarter of last year when the exchange rate jumped to 13 pesos to the dollar. We continue to see our business model perform well in Mexico and remain committed to growing this business and we 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 run while minimizing foreign currency risk. Our ongoing commitment remains to prudently and profitably grow the Mexico business.

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

Thank you, Bill.

Regarding the second quarter for the 12 weeks ended February 13, 2010, we reported sales of $1.5 billion, an increase of 4% from last year's second quarter. Same store sales or sales for stores open one year were up 1% for the quarter. We experienced sales growth from both our retail and commercial customers. Net income for the quarter was $123 million, an increase of 6.4% versus last year's second quarter, and diluted earnings per share increased 21.2% to $2.46 from $2.03 in the year ago quarter. Our continued disciplined capital management approach resulted in return on vested capital for the trailing four quarters of 25.2%. We are proud to report that this metric continues to improve over last year's already industry leading rate. Return on invested capital is a key measure for our success. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital.

Gross margin for the quarter was 50% of sales, up 36 basis points compared to last year's second quarter. The improvement in gross margin of 36 basis points was positively impacted by favorable shrink expense comparison of 17 basis points, a shift in mix of sales to higher margin product and lower product acquisition costs. We continue to not see a material shift to our good level categories from our better and best categories. 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. 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, however, as our key focus is on increasing absolute gross profit dollars. SG&A for the quarter was 34.7% of sales, down 11 basis points from last year's second quarter. The reduction in operating expenses as a percentage of sales was a result of tighter expense management partially offset by 25 basis points of expense from the continued investment in our hub store initiative. As discussed in last quarter's results, this quarter also included an increase in pension expense of approximately $2.8 million or approximately 20 basis points, which reflected the decline in value of the underline assets of the plan. It is our expectation that we will incur a similar expense increase in the upcoming third and fourth quarters of fiscal 2010.

Offsetting the expenditures we experienced a gain similar to many other retailers related to the final Visa, Master Card settlement which for us amounted to $2.5 million or 17 basis points for the quarter. We will continue to appropriately manage our expenditures to enhance the customer experience while being fiscally prudent.

EBIT for the quarter was $230 million, up 7.3% over last year's second quarter. Our EBIT margin improved 47 basis points versus the previous year's second quarter. Interest expense for the quarter was $36.3 million compared with $31.9 million in Q2 a year ago, a 13.8% increase. Much of this increase was due to a combination of terming out a majority of our commercial pay for borrowings in late June, and the additional cost associated with our new three year revolving credit facility, and to a lesser degree increasing our debt outstanding by 3% versus last year. We would expect this higher interest expense run rate to continue for the balance of the fiscal year.

Debt outstanding at the end of quarter was $2.775 billion or approximately $84 million more than last year's balance of $2.691 billion. Our adjusted debt levels at 2.5 times EBITDAR is in line with past quarters results. As we have 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 management's opinion regarding debt and equity market conditions. We purposely manage our capital structure relative to our cash flow in order to maintain our credit ratings and investment grade while optimizing our cost of capital.

For the quarter our tax rate was approximately 36.4% in line with last year's second quarter. For the third quarter we expect to run a higher rate closer to 37%. Net income for the quarter of $123 million was up 6.4% versus the prior year second quarter. Our diluted share count of 50.2 million was down approximately 12% from last year. The combination of these factors drove earnings per share for the quarter to $2.46 up 21.2% over the prior year second quarter.

Relating to the cash flow statement, in the second quarter we generated $119 million of operating cash flow. We continue to see opportunities to increase operating cash flow going forward. We repurchased $88 million of AutoZone stock and at the end of the second quarter we add $517 million remaining under our share buy-back authorization. We continue to view our share repurchase program as an attractive capital deployment strategy.

Next I would like to update you on our inventory levels in total and on per store basis. We reported an inventory balance of $2.3 billion, up 3.3% versus the Q2 ending balance last year. On a per store basis we were down 1.2% at $504,000. We feel our enhanced HUD 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 94.8% versus 90.2% in last year's second quarter. For the quarter total working capital was a negative $101 million versus last year's balance of a positive $112 million. Net fixed assets were up 5.1% versus last year. Capital expenditures for the quarter totaled $58 million and reflect the additional expenditures required to open 33 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 continue to see opportunities to open domestic stores at a low to mid-single digit growth rate for the foreseeable future. We believe opening stores during these more difficult economic times can be beneficial. We opened 24 net new domestic stores in the quarter for a total of 4,289 stores and 48 states in the district of Columbia and Puerto Rico. Depreciation totaled $44.5 million for the quarter, in line with last year's second quarter expense of $41.8 million.

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 was triple B and we have a Commercial Paper rating of A2. Moody's Investor Services has assigned us a senior unsecure debt rating credit of BAA2 and a Commercial Paper rating of P2, and Fitch has assigned us a senior unsecured rating of triple B as well, and a Commercial Paper rating of F2.

Now I will turn it back to Bill Rhodes.

Thank you, Bill.

We managed our business very well during the second quarter. We executed our plan and we had very few surprises. We are encouraged with our execution and excited as we head into the back half of our fiscal year. Our stores appearance looks great. The morale of our field organization is very high. And we are committed to providing the outstanding service and trustworthy advice our customers deserve.

We remain focused on our key priority stated at the beginning of the fiscal year. Number one relentlessly hiring, retaining and training our AutoZoners to make sure we are delivering on our stated corporate goal of providing The Best trustworthy advice. Secondly, continually refining our product assortment in order to meet all of our customer's needs. Third, deploying 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 will continue to test our blended store 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 customers.

As we remain on track with all of these initiatives we promise to continue our focus on innovation and improving every aspect of our business. We remain focused on steady profitable sales and earnings improvement. We had a very good quarter which again is worthy of congratulating our entire organization for their commitment to living the pledge. However, we will not rest on our laurels. Our approach remains consistent. We were focused ongoing the extra mile in 2010 and we will remain -- and we remain very well positioned to do just that.

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

Thank you. (Operator Instructions) Our first question comes from Alan Rifkin with Banc of America. You may ask your question.

yes. Thank you very much. Bill, I'm trying to assess the benefits of the 82 hub stores that have now been converted whether it's sales per-square-foot on the commercial side or number of commercial accounts added. Can you maybe shed a little bit of color on how the profitability of those 82 stores compares to the 60 that have not been converted? And what will be the conversion schedule for the remainder of the fiscal year?

Alan, the first thing I want to make sure and make clear is, a big part of the benefit of the hub stores not only comes in commercial but the biggest part of it comes in the retail side of the business.

As far as those stores, as we have gone through and refined operating model in those 82 stores we've also increased our operational focus on the balance of the stores. So we are seeing tremendous benefits out of the 82. But even the stores that were -- that have not been converted are seeing nice improvements in their sales penetration across the market. As far as profitability we really aren't prepared to disclose the profitability parts of it. But we would not be continuing to roll it out as aggressively as we have if they were not significantly profitable and certainly meeting our internal rates of return.

As far as the rollout going forward, we were continuing to monitor that. We rolled out 22 so far this year. We had a plan to be fairly methodical about it. We are continuing to evaluate that to see, as a result coming in strong as they have, if we might want to consider going a little bit faster.

And Bill, as a follow-up, maybe for Bill Giles. Bill, you said there still was an opportunity to increase gross margin. Going forward, do you think that those incremental gains will come predominantly from shrink, or continuing to lower your procurement costs, or what are the mix benefits there?

I think it's really on the latter part. I think that we have done a great job from a shrink perspective and be able to lower our shrink expense. But as we look on a longer term basis I think we have done a good job, fairly related parts throughout that's helped from a mixed perspective to improve our margin, and the merchandising team continues to do a good job lowering our acquisition costs, which we think we'll also benefit on a longer term basis.

And then just one more question if I may for Bill Rhodes. Bill, you continue to increase your hard line industry operating margin. And it appears that it's actually increasing in the last couple of quarters at an accelerated rate. I know that you have always been reluctant to give guidance. But with the year end operating margin, you know, north of 17%, what are the long term opportunities do you think? Do you think ultimately you can get your operating margins up another 100 or 200 basis points?

You know, Alan, think obviously i think that's the million dollar question. And I think it's important to go back and say what we said in the past. Our objective is not to target a specific operating margin percentage. Our objective is to grow operating profit dollars as fast as we can and make sure that we get good returns on those investments. You know, we could see a time where our operating margin could go down if we could significantly accelerate some part of our business that wasn't as profitable on a percentage basis but provided us 15% returns, we would be willing to do it.

So, what I would say is that we have been fairly consistent since 2006 when we went through our re-investment program. We said it was a one year re-investment program, and it has in fact done that. We increased it slightly since that point in time and we're going to, we're going to do the best that we can do. What does the future hold? I really don't know.

Okay. I mean, do you think that your SG&A rate can -- can over the course of time go back to sub 30% which is where you were 10, 12 years ago if you get the productivity gains that you are anticipating?

Again, I think that what we're really focused on is making sure we make the right investments, continue to capture market share, grow top line, accelerate the commercial side of the business. Focus on ultimately driving EPS and driving our OIC. So, rather than get into a specific rate, and I appreciate the question, for us it's really about making the right investments that will resonate with the customers on a long-term basis, both retail and commercial, capturing market share, and driving our ROIC.

Okay. Thank you both very much.

Thank you.

Thank you.

And your next question comes from Matthew Fassler with Goldman Sachs. You may ask your question.

Thanks a lot and good morning. First of all on the sales front looking at the split between DOI and commercial and context of your overall same store sales increase, it looks like commercial was -- rather DIY was essentially flat. Granted that's against a tough compare, but you run those compares for another couple of quarters. I guess I'm interested in understanding your view on whether we are sort of back to trend line growth in the DIY market and to the extent that you certainly held your gain share based on your accounting from MTD, whether you think that is in fact a flattish market going forward?

Obviously you know we will be cautious about giving forward looking guidance, Matt. But the one thing I would highlight is, during this quarter last year is when we saw the significant acceleration in sales. And they began to accelerate as the calendar year started last year. As we entered this new calendar year our sales comparisons were tougher and it was reflected in our sales performance. Over the long run -- let me back up, the second quarter is also an incredibly tenuous quarter for us. Every single year because you have several holidays in there, and then the weather patterns can be different from week to week. So it's very hard to look at what your individual sales are on a week-to-week basis and be able to really understand the trajectory of your business. As we look forward we came into this quarter and were more cautious on the sales environment and you can see that with our SG&A leverage. We are certainly going to be cautious as we look forward to make sure we were well positioned regardless of the sales environment. But then we are going to work like crazy to continue to capture as much market share and grow our sales as rapidly as we can.

Got it. Second question, you spoke about the mix of discretionary and, I guess, failure and traditional maintenance goods being a bit different this quarter. What does that tell you in your view about the customer that is shopping your store, or about the health of the consumer as it relates to your category?

I would say a couple things. First of all, the hub store initiative in our merchandising team has been intensely focused on improving our hard parts assortment over the last several years. A lot of these failure items that we are seeing increase if sales, those are coming from work that team has done. Secondly, in this economic environment we have been in it for quite awhile now. I think people -- they have to fix failure related items. They don't have an option. They can defer some maintenance. They can clearly defer discretionary, but they don't have the option of deferring failure. So my read on the customer at this point in time is that it's really not that different than it was over the last 12 months or so. And also I don't see it changing rapidly any time soon.

Got it. And then finally you spoke about the One Team effort or experiment. You said you weren't going to say that much more about it. Any additional color you could add on training or payroll? Is this a cost-end sales out kind of effort? Or is it a cost neutral kind of effort for you as you begin to test it.

As we tested it, first of all we have different phases of it. We were testing it in a very small number of stores. In those cases it's basically cost neutral at this point in time. There is possibility we could reduce costs as a result of it. There is a possibility we could increase cost as a result of an improved customer service and therefore sales. The biggest thing that I think it's doing at this point in time is that it's a very strong message to our entire organization that we are one team and that our title is also customer satisfaction. They don't say customer satisfaction retail or customer satisfaction commercial. And the whole mind set of the field and operations, sales and operations team, is already changing to say, you know what, I've got to help out on either part of the business regardless of which part I'm assigned to.

Got it. Okay. Thank you so much.

Thank you.

And this question comes from Colin McGranahan with Bernstein. You may ask your question.

Thank you. Good morning.

Good morning.

Just on the hub store and the new operating model, I think if I recall you are now more than a year into having converted some of those stores. And just wanted to see what kind of cadence of growth do you get as you convert to the new operating model, what do you see that quarter? And then as some of these stores are now hitting year two, what kind of lift are you continuing to see?

We obviously see a significant lift when we first opened the hub stores. That takes a little while for them to ramp up to speed and get the operations refined. But encouragingly, the stores that are in their there second -- and we have five stores in their third year, they all continue to show very healthy sales gains.

Okay. Better than average. So they're still lifting above the control stores that are left that haven't been converted?

Yes.

Okay. And then second, looks like nice reasonable market share gains in the business certainly more in commercial. Do you have a sense from the NPD data where that market share is coming from?

Yes, Collin, and I tried to touch on it in our prepared remarks. It's basically coming from virtually every geographic region of the country in both DIY and DIFM. Sure, there are some differences here and there but are not terribly meaningful.

I was more interested in the type of competitors. Is it coming more from the independent? Is it coming from your primary public competitors --

Oh, okay. I'm sorry. I didn't understand your question. The NPD information is only the eight largest players. So its the public retailers and some of the traditional guys. So, we don't have visibility from that into the independents.

Okay. That's helpful. And then finally just a follow-up on the one team, the blended store concept. In this store have you gone to a single labor scheduling model in some of those tests where you actually sharing associates back and forth between commercial and DIY?

That's the premise as far as some of the work that has to be done to operationalize this initiative. There is a lot of systems work. Some of which is related to labor scheduling and some of which is related to customer service systems like Z-net.

Great. Thank you. Good luck.

Thanks.

Thank you. And next question comes from John Lawrence with Morgan Keegan. You may ask your question.

Good morning. This is Ben for John. Could you talk about how the quarter flowed? I know it's difficult to look at sales on a week by week basis. But, I guess, just kind of how maybe weather impacted the comps.

Yes. Again, Ben, I would go back to my previous comments that the second half was more challenging than the first half and the biggest part of that I wouldn't say was necessarily weather, but it was that we were starting to annualize the significant ramp that we saw last year. Clearly at the very end of the quarter with the heavy snowfall, we had some challenges. But we need to be real careful on trying to read week to week sales. At the end of the day we were pleased with our sales performance. We increased our two year and three year comp store sales performance. We gained market share. So, all in all we feel pretty good about the quarter.

Great. Thank you very much.

All right. Thank you.

thank you. And this question comes from Kate McShane with Citi Investment Research. You may ask your question.

Hi good morning.

Good morning.

I was wondering if you could give a little bit more color. I think you had mentioned in your prepared comments that this is one of the first quarters you saw a pick up in spend for some of your discretionary items even though failure products still perform very well during the quarter. Can you give any more color behind the comments?

Yes. I think what we said was we weren't calling it out as a significant decline. There -- our sales performance and discretionary categories seem to flatten out a little bit. So wasn't a material decline. It wasn't a big gainer. Now I think some of that work is our team that is working on those discretionary categories has really done some great work. I think their -- what we are seeing on the rebound in that business is really a result of their work, not necessarily that consumer behaviors have changed. At least my early read on it.

Okay. Great. And then with some of the dealership closures and the conversions of those dealerships, how is your commercial growth come as a result of this and can you see things accelerate with the continued conversions over the next 12 months?

Yes, I think that's a great question. But you have to go back and remember we only have 1.5% market share. So there is some dynamics that have changed in the macro environment and commercial, but I think our actions and activities determine our success in commercial so much more so than whether a few thousand dealerships close at this point in time.

Okay. Thank you.

All right. Thank you.

Thank you and your next question comes from Tony Cristello with BB&T Capital. You may ask your question.

Thanks. Good morning.

Good morning.

Bill, when you look at the impact of parts proliferation and what you are doing with the hub buildout, can you frame a little bit in terms of how those hubs are capturing the parts coverage? Is that at a certain level today and does what that build out bring you? Does it give you enough parts coverage down the road from an evolving supply chain, if you think the makes and models that are entering your sweet spot in the next three to five years.

A great question and one that we have been very focused on. I will tell you that these super hubs that we were rolling out now we couldn't be more pleased with how they are performing. Their performance is exceeding what we anticipated they would be doing and they have brought a tremendous amount of coverage to the marketplace. As with, what we are always doing is we are always testing. So we are taking opportunities to test even further levels of inventory coverage in select of these stores to see where the right point is. And we will continue to test up and down versions. It's also given us the opportunity to reduce some of the coverage in our satellite stores which will help us from a working capital point of view, allows us to make sure we have the parts and products in the local market and also going back to the hub store and be more efficient about it. But over the long -- parts proliferations here, it's here and been here ever since I got in this business. It continues to grow every year and I think we are pretty well positioned to take care of it.

And when you think about sort of what's going on at the dealership level and the lack of, or the softness in new vehicle sales, that's one less touch point that they have with their customer from a service standpoint as well. Is that also an opportunity as you see that business perhaps coming into the aftermarket, does that mean that the starting point of when you are seeing these late model vehicles is continuing to inch forward? Is that what you are seeing as well?

I think it's a little early to make that call that we are seeing them earlier in their life cycle. Again, on the commercial side of the business, we are still relatively new at it. So we were continuing to learn a lot on that front.

To me the bigger point is that I think people have changed their mind set on how long they are going to hold on to their vehicle and therefore they are maintaining them at a higher level. And I think that's helping both our DIY and commercial businesses and the market itself.

Okay. Great. Thank you.

Thank you. And this question comes from William Truelove with UBS. You may ask your question.

Yes, I have a follow-up question about the commercial accounts. You know, with so many different companies focusing on growing commercial business, has there been a competitive reaction that's changing in that marketplace going forward?

Not terribly. I think we have great competitors whether it's the retail side of the business or the commercial side of the business. But I haven't seen significant changes in the competitive landscape. Obviously there are a lot of people that are very focused on it. The point that we were making to ourselves we were very focused on it. We are also very focused on our DIY business.

Right. And then, a second follow-up on inventory, with the hub stores helping but also with the hard product initiatives that you are talking about, what would you anticipate from a gross inventory per store -- are we going to keep similar levels or could it increase or decrease going forward?

I think I would say similar levels with a slight increase. I think we have done a terrific job of being able to optimize some of our inventory particularly by leveraging the hub stores. But at the same time, as Bill mentioned, parts proliferation is an existing part and an important part of the business and our ability to say yes to the customer requires us to increase our coverage and I think the merchandising team has done a terrific job of that over the last couple of years and I think we were seeing that today in some of the increased penetration that we've put on our failure related parts.

Wonderful. Thank you so much.

Thank you.

Thank you. Our next question comes from Adam Sindler with Deutsche Banc. You may ask your question.

Yes, hi, good morning. This is Adam in for Mike Baker. A couple more questions on gross margins, if I could. The comment on acquisition costs helping to drive gross margins, is that -- maybe get some color on that related to product deflation that we've seen over the past several months helping to drive lower costs or better buying?

Yes, it's a combination of both. There is definitely some product from deflation from some of the commodity based prices, but on longer term basis we continue to increase our penetration of direct imported product so that is actually helped reduce the acquisition costs. So I'd say it's a combination of both. Not just strictly the commodity based process.

And then how that ties into the comments on the growth and operating profit dollars and percentage in the commercial business, I was wondering if you could give some color on how much was possibly starting to get some leverage on the sales force but the very strong 8.5% sales lift versus maybe some better gross margins just on better buying?

Well, they're separate and distinct. And I think we have opportunity to improve operating margin as you articulated both through improvement of gross margins and then as our -- both of our businesses continue to get traction from the initiatives both on the DIY side as well as on the commercial side and we continue to increase our sales productivity, we will have opportunities from a leverage standpoint on SG&A.

But in the second quarter specifically with one a bigger driver than the other gross margin per SG&A leverage?

I would say that actually they were fairly consistent. I wouldn't lean one side to the other.

All right. Thank you very much.

Okay.

And the next question comes from Michael Lasser with Barklays Capital. You may ask your question.

Good morning. Thanks a lot for taking my question. On the commercial side, do you expect that there will be a meaningful network effect where you reach an inflection point from having the rollout of the enhanced hub model completed? Or might it be the case where that is not necessarily true because at least a portion of the customers are up and down the street garages rather than multi-location customers.

I certainly hope that there is an inflection point but I don't think it will be driven by network. Being across the market very completely. Each -- the vast majority of this business today is up and down the street. Customers, they're not looking at the market impact. They are looking at how are you servicing me. So I don't think there will be a massive market share growth aspect.

Okay. And then on the improvement in discretionary sales, do you have a sense whether that's coming from longstanding AutoZone customers, or more so from newer customers that it might have migrated into the market over the last couple of years.

Yes, we really haven't cut it that finely. We are just looking at actions that we are taking and are pleased to see that business begin to turn around, and again congratulate those folks that are out there working with all kind of different vendors trying to find new products that are compelling to whichever customers they are.

And is it -- has it been driven largely by new products, or legacy products that have been doing better?

For the most part in that business there is a lot of new products that you are constantly pulling in and out. But, you also have products in there all the time like floor mats and car covers and we are beginning to see some turn in basically the vast majority of those businesses.

Great. Thanks a lot. Good luck with everything.

Thank you.

And our final question comes from Ivan Holman with RBC Capital Markets. You may ask your question.

Thank you. Good morning and congratulations on a nice quarter.

Thank you.

I just wanted to focus quickly on the commercial side of the business. You mentioned that a portion of your sales acceleration on that side of the business increased due to up and down the street customers. Did you sign any new national accounts? Was there any growth on that side of the biz?

I would say that there was growth on that side. There is no major customer that we necessarily signed over this past quarter. But the national account side of the business continues to actually grow nicely. And so we continue to make good penetration on the national accounts. But obviously the up and down the street side of the business is the majority side of the business, and that's where we fight it every day on the street to win that business.

And there was no specific addition of any particular account or any prospects going forward?

Well, there is always prospects going forward but there was no addition of a specific account that would have material impact on the results.

Okay. Great. Helpful. And a second question if I may. Some of your competitors have mentioned some changes in pricing over the last several quarters. Have you noted anything in particular that has happened over the past quarter?

I would say as we look over the past quarter, we haven't really seen any material changes from a pricing perspective on either side of the business quite frankly.

Okay. Great. Thank you very much.

Thank you.

Okay. Before we conclude the call I would just like to take a moment to re-iterate that our business model remains very solid. Our customers continue to tell us we are improving on our efforts to meet or exceed their needs and our market share data confirms that. Our customers continue to tell us we are improving on our efforts to meet or exceed their needs and our market share data confirms that.

We have a solid plan for 2010, 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 share holder value, we were highly confident AutoZone will continue to be incredibly successful.

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

Thank you and this does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.