汽車地帶 (AZO) 2010 Q4 法說會逐字稿

Good morning and welcome to the AutoZone call.

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

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

If you have objections, please disconnect at this time.

This conference call will discuss AutoZone's fourth 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 AM Central time, 11 AM Eastern Time.

Before Mr.

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

(per recorded statement) 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 the 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 prospect 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 detail 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 read carefully.

Mr.

Rhodes, you may begin.

Good morning.

Thank you for joining us today for AutoZone's fiscal 2010 fourth 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 fourth quarter, I hope you have had an opportunity to read our press release and learn about the quarter's results.

If not, the press release, along with slides 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 an EPS increase of 27.7% and a domestic same-store sales increase of 6.7%.

This marks the seventh consecutive quarter of EPS growth in excess of 20% and the 16th consecutive quarter of double-digit EPS growth.

Back in May, on our third quarter conference call, we spoke cautiously about our sales potential heading into the new quarter.

We were concerned about difficult comparisons and unsure of our customer's buying inclinations.

What transpired and how we executed provides us encouragement heading into our new fiscal year.

While our industry remains strong, we were encouraged by our results for three reasons.

According to MPD data, we gained both dollar and unit share across both of our customer segments, retail and commercial.

Our commercial business has demonstrated strong momentum by achieving accelerated growth each quarter during our fiscal year, ending with a 20% increase in sales for the fourth quarter, our highest increase in several years.

Lastly, we completed the remainder of our hub store conversions well ahead of schedule.

Additionally, we did all of this while delivering exceptional customer service as evidenced by the continued improvement in customer satisfaction survey scores.

While average ticket improved more than transactions, both showed solid positive trends for the quarter.

Last quarter, we mentioned items we felt contributed to our strong sales results.

This quarter we believe our results benefited from macro factors which included an extremely warm summer across most of the US, combined with cost conscious consumers looking to save money.

Those, supplemented by our Company-specific initiatives such as increased inventory availability through our hub store network, our customer service initiatives, and our commercial salesforce continuing to build trust with their professional installer accounts, all resulted in our strong sales performance.

We are kicking off our new fiscal year with our 2011 national sales meeting here in Memphis this week.

This year, consistent with prior years, we have invited our senior field leadership to Memphis to celebrate our very strong financial and operational performance, launch our theme for 2011, and reiterate the key priorities for our organization.

Let me say while I am proud to share our results with you on the phone today, I will be even more excited later today by being able to greet and thank the AutoZoners who delivered this from across North America for their efforts to deliver this exceptional year.

To be able to celebrate growing same-store sales 5.4% on top of a 4.4% increase last year, and growing EPS 27.7% on top of 20% last year is an achievement I will enthusiastically celebrate with our AutoZoners.

We simply continue to execute, and we need to say thank you and congratulations to our organization.

These results are their results, and they should take great pride in their performance.

At our sales meeting, we're going to announce our 2011 operating theme, One Team Going the Extra Mile.

The emphasis this year is on one team and we will focus on incorporating our store level commercial and retail business models more seamlessly.

While we have been streamlining our information systems to make it easier for store AutoZoners to service all of our customers, we will look to build on this theme further in 2011 with improved technologies around B2B, continued improvements to commercial Z-Net, ongoing catalog enhancements, and better parts availability across the chain, all in order to sell it right and keep it sold.

The real emphasis and benefit of our One Team approach is that every customer deserves an exceptional experience when they interact with us.

The attitudinal shift throughout our organization regarding giving every customer a great experience is really making a difference.

We'll also introduce our 2011 key priorities, great people providing great service, continual improvement in our hub strategy, leveraging the internet, profitably growing commercial, ever improving inventory management, and improved product assortments.

These should sound remarkably familiar, because they are.

Our focus continues to be on the basics and executing those basics at an extremely high level.

We'll recognize our best managers with a celebratory event and say thank you and congratulations, but we cannot and will not rest on our laurels.

We must continue to execute.

We'll focus on continuing our share gains in retail while driving to new highs in commercial.

We'll recognize our team for opening 160 net new domestic stores, a 3.8% growth rate, and our Mexico team for opening 50 new stores in 2010, the highest opening level ever, and the 27% store growth rate.

We'll recognize our ALLDATA team for growing their business yet again in 2010.

Look, through boom and bust cycles, our organization has performed well and our financial performance has been strong.

I attribute this solid financial performance to our business model and our culture, a culture where passionate and highly committed people understand the strategies and consistently execute at an extremely high level.

Our team understands this industry and manages our resources very well.

We have been very deliberate in how we manage expenses and capital in order to deliver consistent, strong, financial performance and position our business for long-term growth.

Additionally, I would like to congratulate the organization for delivering on three additional key financial measures.

First, AutoZone achieved 100% accounts payable to inventory for the first time in Company history and actually exceeded that metric, ending at 106%.

While we talked about this metric as a goal for several years, this year, we accomplished it.

I congratulate our merchandising organization and many other parts of the organization who contributed to this effort.

Secondly, the Company generated over $1.1 billion in operating cash flow.

Over the last ten years, we have doubled this number, no small accomplishment.

We should highlight another strong performance in return on invested capital, as we were able to grow this metric to 27.6% on a trailing four quarter basis, which represents another new all time high for our organization.

While we invested over $300 million in capital expenditures this past year to make sure our stores look great and to expand our footprint, we have continued to expand our returns on invested capital.

We will always maintain our diligence regarding capital stewardship.

This morning, we announced that Jim Shea, Executive Vice President Merchandising, Marketing and Supply Chain, Customer Satisfaction will be retiring at the end of the month.

Jim joined AutoZone's six years ago after a very distinguished career with several other retailers.

During his tenure here, he has made significant contributions throughout many parts of the organization.

I would like to personally thank Jim for his passion and commitment to the success of this great organization, and especially for his leadership.

Jim has worked very hard to develop his organizations and their leaders, and although we will certainly miss him, due to his efforts, we have the individuals in place to continue to ensure our prosperity.

On behalf of all of our AutoZoners, we wish Jim and his wife Sue all the best in their very well deserved retirement.

Now we'll 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.

For purposes of this discussion, we have separated our categories into three groups.

In total, this past quarter, the category of merchandise we described as failure grew at over 12%, versus maintenance growing at 7% and discretionary growing at 5%.

Failure represented 45% of the sales mix versus maintenance 38% and discretionary 17%.

Discretionary percentage mix declined from 18% in the fourth quarter of last fiscal year.

While we provided this level of detail for a few quarters now, we believe the story remains the same year-over-year.

With the sales increasing we have not seen consumers change their buying behaviors.

People are continuing to look to AutoZone in order to save money repairing and maintaining their vehicles during these difficult financial times.

Regarding our mix of good, better, best category sales, we continue to see traction with customers buying our better and best lines.

We believe people appreciate the enhanced product quality and extended warranties they're buying when they buy up in these select categories.

From a regional perspective, based on MPD market share data, we continue to see market share gains in both retail and commercial in virtually every major geographic segment.

We recognize that our competitors, both large and small, are strong, and therefore, it remains incumbent on us to continue to execute at an extremely high level and continue to enhance our offerings to deliver a differentiated customer experience.

As I mentioned earlier, we have several initiatives under way at various stages, but I would like to highlight the performance of our hub store enhancements.

Last year we implemented an enhanced hub model in 60 of our 143 hubs.

This portion of our enhanced model focused on increasing the frequency of the delivery from hubs to satellite stores.

I am very happy to say that this morning, we converted the remaining hub stores, a total of 35 this quarter, well ahead of our initial plans.

Therefore, all 143 hubs are now converted, and we also opened two additional hub stores this past quarter.

We now have 145 hub stores.

We believe our enhanced hub initiative has dramatically improved customer service.

By increasing the frequency and reach of our daily deliveries to satellite stores, we are saying yes more frequently to both retail and commercial customers, while optimizing inventory.

While this initiative represented a material investment, both in terms of operating expenses and some capital, the sales results encouraged us to continue to accelerate our efforts.

The incremental parts additions that now are sold throughout the surrounding satellite stores are both exceeding plan, and adding to the overall sales performance of the hub store and its market.

Our earliest hub conversions, which began back in 2008, continue to experience sales growth as we refine the assortment and the operating model.

Obviously, hub conversions was one of many initiatives that we implemented, so specifically quantifying the benefits of the hubs in isolation is difficult.

Some people might ask what's the next step with your hub store effort?

Our next step is to ensure that our hub stores are adequately sized to support the related demand of their satellite stores, and to ensure they're located in the optimal place.

Therefore, over the next few years, we plan to expand or relocate many of our hubs, which we believe are currently undersized or are not optimally located.

We are in the very early stages of quantifying the number of locations that need to be expanded or relocated.

We do not anticipate this to have a material impact on our annual capital expenditures.

Long-term, this will allow us to add inventory in select markets that will drive sales for both our retail and commercial businesses.

Additionally, this enhanced hub model is still relatively new.

We continue to test revisions to our product assortment in our hubs.

By levering our current hub network, we have been able to reduce slow moving inventory in satellite stores by consolidating it into the hubs, with an overall net reduction.

This has helped us achieve an inventory reduction per store to $498,000 from $506,000 just last quarter.

While this reduction helped working capital this past year, I do expect inventory levels to increase over time, as we believe there remains inventory addition opportunities across most car part categories.

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

We continue to feel margin opportunities exist for us in the near term.

We continue to believe there are opportunities to increase gross margin rate over the long-term.

From an expense standpoint, we continue to accelerate some of the initiatives that we have been testing or rolling out to the chain in order to ensure that we are in a position to deliver great customer service and trustworthy advice both in the short and long-term.

While our operating expense percentage growth has increased over the last two years, we have been purposely investing these dollars to position the Company for future sales growth.

We have maintained our discipline hurdle rate on these investments, and we remain on track with our projections.

This organization takes great pride in our disciplined approach to managing our cost structure and leveraging our culture of thrift, and we remain committed to drawing back expenses, if warranted.

We continue to be well positioned to manage our cost structure for the foreseeable future.

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 our gross margin results, operating expense results, balance sheet and cash flows.

For the quarter, total auto parts sales increased 9.6% versus last year's fourth quarter 7.1%.

This segmentation includes both our domestic retail and commercial businesses and our Mexico stores.

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 completed category line reviews in 30 of our 40 plus major merchandise categories and we completed line reviews for all merchandise lines in every major category again this year.

Our category coverage remains a key priority, heading into the new fiscal year.

Additionally, I would like to thank our suppliers for their support in helping us to achieve our results this past year.

Their dedication and commitment to our model and our customers has allowed us to grow sales materially over the last two years.

I will break my comments regarding retail sales up into a couple of major categories.

In addition to my previous comments regarding our enhanced hub store model, I would like to address two specific other areas.

First, we'll touch on recognition and training initiatives this past quarter, and second we'll address the macro trends we have seen.

Training continues to be a key priority to improve customer service and increase sales.

This past quarter was no different.

We focused on our Sell It Right initiative across our stores and backed up the training with our new Coaching For Success program to energize our AutoZoners, all with a goal of better customer service while continually improving retention rates.

Every quarter, our job is to improve upon our customer service levels.

In an era where so many retailers have gone to self checkout and reduced customer interaction, we take personal interaction with our customers very seriously.

We know that our customers want to get in, get what they need and get back on the road.

But they are most often looking for friendly, trustworthy advice.

Therefore, we developed comprehensive training materials to make sure our AutoZoners are doing everything they can to help the customer do the job right the first time.

We remain committed to providing wow customer service through improvements in all facets of our store level execution during the fourth quarter.

Regarding macro trends, during the fourth quarter unloaded gas prices started at $2.91 a gallon and steadily fell throughout the quarter, finishing at $2.68.

Last year gas prices climbed throughout the fourth quarter from $2.24 to $2.61.

We believe gas prices have not been a material story to our sales results over the last quarter, although we have seen encouraging signs of price declines as of late.

Miles driven remains less of a story to our near term sales results than in previous years.

This past quarter, May was slightly negative while June was up 1.3%.

While recently we have seen minimal correlation in our sales performance with miles driven, historically it has been one of the key statistics which correlates our sales results 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 material positive impact on our results as the country experienced much warmer weather than the previous year.

The trailing four quarters auto parts sales per square foot were $246.

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 20.2%.

As I mentioned before, this was our highest growth rate in several years, and the team demonstrated solid momentum throughout fiscal 2010.

We remain encouraged by the consistent progress we have made, demonstrated by the continued acceleration in our sales performance over the past several quarters.

Our sales growth has 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 offerings.

For many previous quarters, we talked about testing and studying to identify growing scalable commercial business strategy.

Today, we're confident in saying we like our model for the future.

We believe we can grow revenues in both existing stores and even begin to experiment with opening additional commercial programs at a measured pace.

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

We now have our commercial program in 2,424 stores, supported by 145 hub stores.

During the quarter, we opened 85 additional programs.

A majority of these openings happened in the back half of the quarter.

Commercial programs are now operating in 55% of our domestic stores.

While we have opened more commercial programs this year than in recent years, our primary focus in 2011 continues to be on growing sales in existing programs.

Our main focus remains on building and developing our salesforce.

We congratulate our salesforce of 200-plus for their commitment to growing relationships across the country.

This salesforce continues to be expanded, but the most significant focus is on continuing to grow and mature significant focus is on continuing to grow and mature our sales team as it remains relatively new.

The majority of our business remains with up and down the street customers who are independently-owned repair shops.

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 are constantly focused on ensuring that our investments are resulting in improved sales and profitability.

While we were successful in growing both operating margins and dollars for our commercial business, we did increase our investments in this business.

We continued to add to both our sales managers whose primary job it is to develop and cultivate customer relationships and to commercial store labor hours to ensure higher levels of service to these important customers.

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

We continue to be very excited about our commercial growth opportunities for many years to come.

Lastly, we completed our rollout of Z-Net for commercial, that better leverages the wealth of content we have available and creates a common operating system platform, that is considerably more intuitive to operate across both businesses.

We rolled this technology to our entire domestic chain this quarter.

While improvements to the systems will continue to be implemented throughout 2011, we believe this technology improves the potential of utilizing our store labor hours more effectively, thereby garnering better coverage and support for both types of customers.

While we continue to be encouraged by the feedback we received from our AutoZoners, we understand it will take time for them to utilize this technology to its fullest extent.

This will be a key priority for us heading into 2011, and we promise to keep you abreast of any material developments.

In summary, the commercial business had a great 2010, and we are very excited as we start 2011.

Our Mexico stores continue to perform well, although the economic and security challenges in Mexico have been a head wind for our business.

We opened 26 new stores during the fourth quarter, and currently have 238 stores in Mexico.

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

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

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

Thanks, Bill.

Regarding the fourth quarter, for the 16 weeks ended August 28th, we reported sales of $2.445 billion, an increase of 9.5% from last year's fourth quarter, and domestic same-store sales, or sales for stores opened more than one year were up 6.7% for the quarter.

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

Net income for the quarter was $269 million, an increase of 13.9% versus last year's fourth quarter, and diluted earnings per share increased 27.7% to $5.66 from $4.43 in the year ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 27.6%.

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 50.5% of sales, up 20 basis points compared to last year's fourth quarter.

The improvement in gross margin benefited primarily from leveraging distribution costs, due to higher sales.

This generated 26 basis points of favorability.

Looking forward, although we believe there continues to be opportunity from gross margin expansion, it is important to highlight that we do not manage to a targeted gross profit margin percentage, but rather on absolute gross profit dollars.

SG&A (sic - See Presentation Slides) for the quarter was 31.2% of sales, down 43 basis points from last year's fourth quarter.

The reduction in operating expenses as a percentage of sales reflected leverage of store operating expenses due to higher sales, partially offset by increased legal costs and continued investment in our hub store initiative.

In addition, as discussed in the last three quarter's results, this quarter also included an increase in pension expense of approximately $3.8 million, or approximately 16 basis points, which reflected the decline in value of the underlying assets of the plan.

It is our expectation, pension expense will not be a material basis point headwind in 2011.

We will continue to appropriately manage our expenditures to enhance the customer experience while being fiscally prudent.

EBIT for the quarter was $473 million, up 13.2% over last year's fourth quarter.

Our EBIT margin improved to 19.3%, or 63 basis points versus the previous year's fourth quarter.

Interest expense for the quarter was $49.4 million, compared with $47.8 million in Q4 a year ago, a 3.5% increase.

This increase was due to 6.7% more debt outstanding versus last year.

As a reminder, interest expense is higher in our fourth quarter, as there are 16 weeks during this quarter versus 12 in quarters one through three.

Debt outstanding at the end of the quarter was $2.9 billion or approximately $180 million more than last year's balance of $2.7 billion.

Our adjusted debt levels at 2.4 times EBITDAR are 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 we feel comfortable that we are well within on appropriate range to achieve that objective.

While in any given quarter, we may increase or decrease debt levels based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy and share repurchases are an important element of that strategy.

For the quarter, our tax rate was approximately 36.5% above last year's fourth quarter of 36.2%.

We expect to be closer to 37% on an ongoing basis.

Net income for the quarter of $269 million is up 13.9% versus the prior year's fourth quarter.

Our diluted share count of $47.5 million was down approximately 11% from last year.

The combination of these factors drove earnings per share for the quarter to $5.66, up 27.7% over the prior year's fourth quarter.

Relating to the cash flow statement for fiscal year 2010, we generated $1.196 billion of operating cash flow.

As Bill said earlier, this was a record for AutoZone.

We continue to remain focused on increasing operating cash flow heading into 2011.

We repurchased $565 million of AutoZone stock in the fourth quarter and at the end of the quarter, we had $185 million remaining under our share buyback authorization.

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

We repurchased $1.1 billion of stock this past year, on top of the $1.3 billion last year.

To date we have bought $8.7 billion of our stock back.

Accounts payable as a percent of gross inventory finished the quarter at 106% versus 96% in last year's fourth quarter.

I will second Bill's previous congratulations to the organization for achieving this self-created milestone, but our organization will not rest.

We will continue to push ourselves to improve upon this level.

Next I would like to update on you our inventory levels in total and on a per store basis.

We reported an inventory balance of $2.3 billion up 4.4% versus the Q4 ending balance last year.

On a per store basis, based on a combination of 100% AP to inventory and lower gross inventory per store, we achieved our first ever negative inventory per store number, a negative $28,000 per store.

We feel 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.

Net fixed assets were up 7% versus last year.

Capital expenditures for the quarter totaled $135 million, and reflected the additional expenditures required to open 107 new stores this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters.

As we would rather purchase land than rent locations our capital expenditures were higher this past year as we were success in finding better prices in light of the difficult economic times.

Specifically related to new store openings, our new store openings have performed well throughout the year, and we 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 advantageous.

On a projected new store sales per store basis, our performance is exceeding planned expectations.

We feel very comfortable with our projection capabilities in this marketplace.

We opened 80 net new domestic stores in the quarter for a total of 4,389 stores in 48 states, the District of Columbia and Puerto Rico.

Depreciation totaled $62.2 million for the quarter, versus last year's fourth quarter expense of $57.2 million.

Our senior unsecured debt rating from Standard & Poor's is BBB, and we have a commercial paper rating of A2.

Moody's Investor Services has assigned us senior unsecured debt credit rating of B or A2 and commercial paper rating of P2 and Fitch has assigned us a senior unsecured rating of BBB as well and a commercial paper rating of F-2.

Now I will turn it back to Bill Rhodes.

Thank you, Bill.

Before we conclude, I wanted to take the opportunity to reflect on fiscal 2010.

Our organization performed extremely well for the year, both operationally and financially.

I am extremely pleased with our accomplishments, and I would like to recap a few of those key accomplishments in recognition of the dedication, passion, and commitment of our AutoZoners.

We built on last year's strong same-store sales results, growing at 5.4% versus last year's 4.4%, our best two year comp performance since 2002-2003.

We continued our focus on developing the commercial business and grew commercial sales by nearly 14% for the year with accelerating sales performance in each quarter of fiscal 2010.

We grew market share in both our retail and commercial businesses.

We opened a total of 213 stores including 50 stores in Mexico.

We grew EBIT dollars by 12%, and EPS by 27.6% on top of 20% last year.

This year's EBIT margin of 17.9% represents a new all time high.

Our return on invested capital reached a record 27.6% for the year.

We exceeded $1.1 billion in operating cash flow for the first time.

We achieved our previously stated goal of 100% AP to inventory, ending at 106%.

We repurchased stock, representing over 10% of the current market capitalization of the company for the second year in a row, and probably the most important of all, our AutoZoners continue to dedicate themselves to providing the industry's best customer service.

Their dedication is what makes our organization great.

Our major objectives for 2011 will sound remarkably familiar.

They are great people providing great service, continual improvement in our hub strategy, leveraging the internet, profitably growing commercial, ever improving inventory management, and improving our product assortment.

Clearly in 2010, we had macro factors that positively contributed to our success.

However, our organization was well positioned and prepared to capitalize on these favorable trends.

How long will these factors positively influence our performance?

We simply don't know the answer.

But we do know that we have been able to very effectively manage our business regardless of the economic cycle as evidenced by our string of 16 straight quarters with double-digit EPS growth.

Again, our business has performed well for many years now, but we cannot rest, and we will not rest, and you have our commitment that we will never do that.

Finally, before we move to Q&A, I want to again thank and congratulate our entire organization for their dedication to our customers, their fellow AutoZoners, stockholders, and our communities.

It remains a distinct honor to work alongside this fabulous team.

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

(Operator Instructions).

Our first question comes from Alan Rifkin, Banc of America.

Your line is open.

Thank you.

Congratulations on a great quarter and year.

Question for Bill Rhodes.

Bill, your gains on the commercial side clearly are accelerating, yet at fiscal year end as you point out the commercial programs only in 55% of your stores which is a similar proportion as last year.

I know you said that you continue to view greater opportunities in growing sales in existing programs.

Can you just elaborate a little bit on why you don't see more opportunities to add commercial programs to already existing stores?

Yes.

I might articulate it differently, Alan.

Personally, I do see opportunities to add it to additional stores, and as we mentioned, we have added it to I think 84 in the quarter primarily in the back half and that's our initial -- everything we do we test, and that's our initial test, and to taking it to the next level of expansion, but our primary focus remains on making the programs that we have in place.

We have over 2,400 of them; how do we make them as productive as they can be?

I want to be very careful not to distract from the progress that we're making in those existing programs by getting the organization so focused on expansion of new programs.

I do believe they will come in time.

I do believe we'll do it the AutoZone way, which will be prudent and it will be profitable, but we're beginning that expansion because I think the organization is a place now where we can begin to accelerate that a little bit.

Okay.

One follow-up if I may.

With respect to the hub rollout, obviously the acceleration and completing the program at fiscal year end to suggests that you're obviously very satisfied with the results.

How are the stores that were support by the original 60 hubs added in fiscal 2009 performing relative to the 80 plus hub that is were added this past fiscal year?

First of all, all the hubs continue to grow and continue to grow at a very healthy rate, even the five test stores that we opened, I believe in fiscal 2008, them and their satellite stores, continue to perform very well and frankly all of them continue to exceed our expectations.

So we couldn't be really more pleased with the progress that we're making in the hub stores, and the beauty of it is we talked a little bit in the prepared remarks about we're going to be relocating some of those over time.

We're doing as well as we are, and we still have significant amounts of those stores that are constrained.

They don't have the size to have the parts assortment in them that we want so over time we'll be expanding those, and that will give us additional benefits in the future.

Thank you very much.

Thank you.

Our next question comes from Gary Balter, Credit Suisse.

Your line is open.

Hi, this is Simeon Gutman for Gary.

The Company has done a fairly good job and fairly consistent job flexing expense dollar growth with sales growth actually throughout last year.

As fiscal 2011 starts, in light of the continued strength in demand, are there thoughts to accelerate investments in the business to take advantage of some of that growth?

I think actually, I think we have done a good job over the last year or two of continuing to make investment that is we believe will continue to improve customer service and continue to capture market share.

The hubs as Bill articulated are a great example of some investments and training and handful of other things we continue to do.

We'll begin to anniversary some of these investments as we get into 2011.

We believe there is more opportunity for us to continue to make investments, again just to highlight the hubs as Bill mentioned as an example, there is a real opportunity for us to be able to expand the size of many of the hubs that exist today.

There is an opportunity for to us relocate some of the hubs to more optimum locations so there is continued investment to be making from that standpoint, our One Team strategy, the investments that we made both from commercial Z-Net, will continue through 2011, and so there are investments to be made, but we'll continue to moderate those investments in light of our overall sales performance, but what we feel really good about is the position we're in heading into 2011.

We made great investments in both fiscal year 2009, 2010, and we think we're very well positioned as we head into 2011.

Okay.

And then can you provide any additional color on the Z-Net commercial?

We have seen the system in place and I realize there is a lot of things happening at commercial now, and it is hard to separate out one sales benefit from the other, but besides ease of use benefits, have there been any noticeable trend differences in stores that have had that?

It is very new.

We just launched this in the fourth quarter, so it is really in the very early stages, but it will provide a lot of efficiencies from the store perspective and it will be able to really be able to leverage the benefits of everybody in the store being able to service not just commercial customers but all of our customers, and so the real theme is being able to have one unit within a store, being able to service both our retail and our commercial customers on an ongoing basis.

If I may add something there, our old commercial order management system was very much designed for commercial but it was very cumbersome.

It took 21 specific steps at one point in time to order a part.

We re refined it over the years and now with commercial Z-Net there is four steps to order a part and three of them are the exact same steps that you take when you are working with a DIY customer, so it makes it significantly easier for anybody in the store to work in the commercial program, which means we'll give better service to our customers.

Thanks.

Our next question comes from John Lawrence, Morgan Keegan.

Your line is open.

Good morning, guys.

Good morning, John.

Just quickly, Bill, going back it the examples on the commercial program, can you go back and look at those early stores and talk a little bit what you have learned from the system side of handling the inventory in those hub stores over the course of time and knowing what to put in those hub stores and how has that inventory creeped if you will?

What have you learned from a leverage standpoint there?

It is really interesting, John.

We have been very pleased with the performance of the incremental inventory that we have added.

We have added hundreds of millions of dollars of inventory over the last three years, and primarily focused on late model coverage, and it has benefited our commercial program significantly but to our very much surprised, it has benefited DIY very well as well, approximately two-thirds of the sales that go out from that incremental inventory go out through DIY, so it is great for both parts of the business, and not only do we add all of that inventory but our inventory per store is actually down, so we have been able to take unproductive inventory out of the system in totality, and we have been able to move slower moving inventory back to the hub stores themselves.

We think there is still a lot of work to be done there, and both on adding new parts and also refining the placement of which parts should be in the satellite stores versus the hub stores.

Thanks for that.

Bill, would you comment just your comments regarding new store performance, would you go to the next layer there and give us a sense of obviously, your entry cost is coming down as far as in this environment finding those locations and then number two with the success of the macro environment, what kind of differences are we seeing in that first year performance versus say two or three years ago?

I would say that we are definitely finding opportunities to get in the markets in a little bit more aggressive way than we have previously and clearly some of that is the macro environment being in our favor, so we have been successful on that front.

I would say from an overall performance standpoint, the Company overall has had a very strong performance and that is getting reflected in the new store opening performance as well.

And so I think the new stores are benefiting from some of the investments and some of the changes that we have made as well as some of the tail wind we're getting from an industry perspective as well, so I think you can think about it that way, and the new stores are being more productive, certainly than they were a couple of years ago.

Some of that is industry related and some of that is probably real estate related as well.

That would exceed the normal sort of comp rate that we're seeing?

We are certainly doing better than we planned from a new store perspective.

Congratulations, guys.

Thanks.

Thank you.

Our next question comes from Matt Fassler, Goldman Sachs.

Your line is open.

Hi.

Good morning.

This is Ryan Brinkman for Matt Fassler.

First question, how much is front end pricing perhaps driving some of the comp sales we're seeing, for example, what sort of trends are you seeing in the area of motor oil and related products?

I would say very little.

I would say that from a commodity based pricing we certainly haven't seen any ups on that one.

If anything it is probably a little bit of a head wind for us from that perspective.

If you look at the front end overall, I would say that retail pricing certainly not a story line relative to our overall comp performance.

If you look at the on shelf price of the standard conventional motor oils, they have actually gone up some and the vast majority of what we sell is through promotion and those promotional prices really haven't changed.

That's great.

Can you talk a little in terms of the impact that the rising mix of commercial sales might be having on total margins?

Yes.

I think that obviously the commercial business as we articulated in the past has had a slightly lower margin and obviously from return on invested capital, it is very accretive because it is very little investment.

It is just launching a commercial program, but it does have a little bit of impact on our over all margins and having said that our margins are up 63 basis points for the quarter.

Just the last question, I know you have targeted 100% payables ratio.

How sustainable in your view is a payables ratio above 100%?

I don't think the goal is 100% any more.

I think the goal goes up from here.

Certainly our plan for fiscal 2011 is higher than it is today.

I don't think it is sustainable, I anticipate it will grow over time.

Great.

Thank you very much.

Our next question comes from Dan Wewer, Raymond James.

Your line is open.

Thanks.

Bill, AutoZone leads the industry in virtually every performance metric, the one area that you have a lot of head room is commercial.

You talked a lot today about the investments that you have made.

When you look at your commercial sales per store, looks like there is probably $200,000, maybe a bit more than that, before you begin to reach the level of your competitors.

With the investments that you have made, do you now have the resources to take your commercial sales per store up to around $600,000?

If not, what else needs to happen?

I think it is an excellent question, and I think the general answer is yes, the more specific answer is we have a great salesforce that's in place now.

We have been growing it over the last year, and we continue to expect to grow it over time.

Candidly, I don't think we know yet what the right ratio is for a sales territory sales manager on a per store basis, and that will change as we continue to refine it.

Generally, the vast majority of the investments are in place.

Unless we find additional investments that drive accelerated performance.

I think we have a very bright future for a long period of time.

We certainly understand that we are fifth in this business, and we don't like being fifth, but at the same time I am very pleased with the progress that our commercial team has made over the last couple of years.

When you look at the 20% commercial growth, was this primarily moving from number 6 to number 5 on the call list from your commercial accounts or was there success in adding new accounts for the stores that already had commercial programs?

I mean, first start was I think we're number one on a lot of customer's call lists, and we're not on a lot of customer call lists.

I think the vast majority of what we have done is grow with our existing customers.

We have grown with new customers and frankly we have lost some customers and have to go back and regain those customers.

Our trends in both new customers and in retention are both increasing and that's encouraging.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Greg Melich, ISI.

Your line is open.

Thanks, guys.

I wanted to follow up on the cash flow and the AP inventory and think about how it actually impacts the business.

CapEx it sounds like could come down a little bit this year just given the changes you made in the hubs are behind us.

Just wanted to confirm that or get a number, and then, two, if we keep taking AP inventory to 110% or 120%, does that change your view in terms of building stores just given that building stores becomes at least a working capital positive cash flow event?

Thanks.

I take the CapEx first.

I would not necessarily see CapEx issues coming down.

In fact, many of the things we did from a hub perspective over the last year or so are mostly operational in nature and being able to deliver stores three times a day and some of the things that we're talking about in the future will probably have CapEx associated with them relative to expanding the size of the hubs as well as relocating the hubs, so there will be some incremental well as relocating the hubs so there will be some incremental CapEx expense associated with that.

And we don't anticipate our overall CapEx program to a number of stores and maintenance and those kinds of things and regular investments into the business changing so our expectation CapEx would be consistent and probably increase as we move forward.

Relative to working capital on the new stores versus AP to inventory, I think we kind of separate those two things.

We believe that we're getting great productivity out of our new stores currently.

We hold ourselves to an IRR hurdle rate for all of our new stores and so as long as they achieve the hurdle rates we'll continue to expand stores.

We don't feel as though new stores are constrained by capital necessarily.

We believe that we're growing them at an appropriate pace for the organization to digest and for us to be able to find a location in the marketplace, and so we'll continue to do that.

We'll continue to manage and optimized working capital across the board in AP to inventory is a perfect example of our ability to be able to do that, and there will be other areas, but AP to inventory is one that again as Bill mentioned we hit a milestone of 106% and that's behind us and now we'll move onto more milestones.

As you broke through that milestone, was it more -- what really changed versus say just a year or two ago?

Is it different vendors or just buying more volume from the same vendors or longer terms with everybody?

It is a lot of different things and to be able to get there and exceed 100% obviously those wheels need to be in motion a year or so ago, and so the merchandising organization along with several others in the organization have worked hard at this and it is certainly not something that happened in one quarter or two quarters.

It is probably been worked on very hard over the last eight quarters, and this is a culmination of a lot of work and it includes both some of the working with the partnering some of the vendors in terms of terms and also includes inventory productivity and inventory turn is up a little bit and I think the complexion of our inventory is actually healthier and stronger today and so there is a lot of those factors that go into account to get us to an AP inventory ratio of plus 100%.

That's great.

Thanks, guys.

Thanks.

Our next question comes from Kate McShane, Citi Investment Research.

Your line is open.

Hi.

Thank you.

I was wondering if you had any additional comments into some of the customer acquisitions that you have made on the commercial side as to what some of the commentary has been from your customers, as to why they're switching and going to AutoZone versus a competitor?

Kate, I think it is a wide range of reasons why they shift, and one thing in this business is a customer does not have a sole supplier.

It is not we come in and we take over for brand X.

Maybe we have get a foray into their brake business or we have their brake business and we expand into starters and alternators.

I think the biggest thing we have done is a couple of things.

This is what we're hearing from our customers.

Number one, we have improved our core execution, and whether that's inventory in our stores, whether that is great commercial specialists and great drivers giving consistent service, that's the first thing, and at times we haven't been as good as we would like on that front.

The second thing is we now have somebody out there telling our story.

For years we were in the commercial business and there wasn't anybody going to the shop telling our story and talking to the shop owners about what their challenges are, where are their headaches, where are their pain points and what can we do to help them?

Now we have well over 200 people that are in those locations every day making it, an enormous number of sales calls that are telling our to her and then also helping us refine where we do have operational issues back in the stores.

Okay.

That's really helpful.

Thank you.

My next question is on what you called out during the call as your driver for comps during the quarter, and I think you had said that the biggest drivers were the age of cars and warmer weather, and I wondered if there was any insight into what would have been like with more normalized weather, and if warmer weather has any implications for business in the winter months?

The second part of that is an excellent question.

That's all a great question.

Clearly we would love to be able to tell you exactly what weather was.

It is really difficult to determine the specific impact.

We believe it was a contributor, but it was one of many contributors.

Macro factors helped us, but I got to tell you the hub store impact, the execution level at the stores, don't forget we ran 20% growth in commercial.

I think there were a tremendous amount of factors that influenced it.

As far as looking forward, last year we had a pretty extreme weather, and this summer we had a pretty extreme summer.

Extremes put stress on parts, and I think it would be very understandable to expect that if we have a challenging winter season, that this summer's heat will encourage more part failures in the winter months.

If you look at what we talked about when we talked about the various types of categories where we saw growth, failure was the highest category, and that hasn't necessarily always been the case.

Very helpful.

Thank you.

Thank you very much.

We have a question from Michael Lasser, Barclays Capital.

Your line is open.

Good morning.

Thanks a lot for taking my question.

Now that you're complete with the rollout of the enhanced hub stores, do you think you're providing greater value to customers through broader parts coverage and if that's the case, does it change your general view of product pricing?

Might you take a more aggressive stance for the more greater value you're delivering?

The answer to the first part of your question is absolutely.

There is no question that we're in a much better position to give great customer service, and candidly on Kate's previous question we were talking about the fact that commercial customers have multiple suppliers.

If we say no to them on a certain part, they're not as likely to pick up the phone and call us the next time.

So I think it deepens our relationship with both commercial and retail customers.

As far as it having any difference in our pricing strategy, I would say absolutely not.

This industry is not one that is has tremendous elasticity to it.

If we put starters and alternators on sales of 50% off, it is not going to change the demand.

We have picked up a few incremental sales, but not a material amount, so I don't think that parts coverage and expanded parts coverage has any determinant on our pricing philosophies.

I was thinking about it from the other side given the elasticity demand, there may be some opportunity to raise prices given the increased value that you're offering.

It is a very competitive industry and it is a very fragmented industry.

We compete with all the name brands you're familiar with but we also complete with a lot of mom and pops across the country and compete with the other retailers, large retailers on certain parts of our assortment, and we compete with the WDs.

I think our value proposition is we're not going to be undersold, period, and we feel comfortable with where our pricing philosophy and obviously have been able to generate great margins with the philosophy that we have.

Okay.

Thanks a lot.

Good luck coming up in the new fiscal year.

Thank you very much.

I will now turn the call back over to Mr.

Rhodes for closing comments.

Okay.

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

We remain excited about our growth prospects for the upcoming year.

We cannot take anything for granted, as we understand our customers have many alternatives.

Our culture remains our key point of differentiation from our competition, and we must not lose sight of the importance of basic store execution in order to remain successful.

We have a solid plan for 2011, and as usual, our team cannot wait to get started.

In fact, they're well on their way.

I want to stress that this is a marathon and not a sprint as we continue to focus on the basics, and never take our eye off optimizing long-term shareholder value, we're highly confident AutoZone will continue to be incredibly successful.

We thank you for getting in the zone this morning and participating in today's call.

Have a great day.

That does conclude today's conference.

Thank you for participating.

You may disconnect at this time.