汽車地帶 (AZO) 2011 Q1 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

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

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

If you have any objections, please disconnect at this time.

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

Bill Rhodes, the Company's Chairman, President, and CEO will make 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 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," "positioned," "strategy" and similar expressions.

These are based on assumptions 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 factor section contained in Item 1A under Part 1 of our Annual Report on Form 10-K for the year ended August 28, 2010, and these Risk Factors should be read carefully.

Thank you.

Mr.

Rhodes, you may now begin.

Good morning.

And thank you for joining us today for AutoZone's fiscal 2011 first quarter conference call.

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

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

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

Please click on quarterly earnings conference calls to see this.

We are very pleased to announce a strong start to our fiscal year, with an increase in EPS for the first quarter of 33.7%, and a domestic same store sales increase of 9.5%.

This marks the eighth consecutive quarter of EPS growth in excess of 20%, and the 17th consecutive quarter of double-digit EPS growth.

Just eight weeks ago, during our fourth quarter conference call, we highlighted our operating theme for 2011.

One Team, Going the Extra Mile, and outlined the key elements in making that theme a reality.

This morning we will update you on our progress on these initiatives and give some color on the opportunities and obstacles we may face for the balance of the year.

Along the way we'll address what we've learned.

First, I want to congratulate our entire organization on another very impressive performance in the first quarter.

Our sales results accelerated this past quarter in both retail and commercial, and a key contributor to that acceleration was the execution levels of our organization across the board.

On both a two year and three year comp store stacked basis our trends accelerated, and we continued to gain share in both commercial and retail in virtually every geographic area of the country.

As you know, our retail sales represents the largest percentage mix to our overall sales.

According to third party statistics, our share of the addressable $40 billion plus retail segment has grown consistently over the last couple of years.

To me, it's quite impressive that we have continued to consistently gain share year-over-year in the retail business as the market leader.

Obviously, this has been our strength historically and let me assure you that we will never take our eye off of this important ball, nor will we ever take our position as the market leader for granted.

Regarding commercial, this quarter followed on last quarter's 20% plus growth with sales growth of 21%.

This marks our 14th straight quarter of sequential improvement in commercial sales growth.

While yes, we gained share in this sector as well, it still represents only 12.4% of our overall sales, up from 11.6% this time last year.

Today it is a substantially smaller percentage of the business than retail, but it is important to remember that the commercial sector of the industry is substantially larger than the retail sector, approximately 30% bigger.

Many of our competitors have stated specific goals on how they want to see their mix of sales between commercial and retail.

We have elected not to have such a stated goal, as we don't believe the size of sales in either business has a material impact on the other sector, except that the higher our combined sales, the better we can leverage our expenses and assets.

The bottom line is, we don't want to put any false constraints on our opportunities in either retail or commercial.

We have tremendous opportunities in both, and we will aggressively pursue both.

As validated by the continued acceleration of our commercial sales growth, we are quite pleased with the strategies and tactics that we have developed over the last several years, and believe we are on track to build a strong sustainable business for the long term.

During the quarter, we opened 54 programs.

We now have commercial programs in 50% of our stores, up from the 54% last year.

Additionally, our other businesses, ALLDATA and e-commerce, had a fine quarter, up over 11% in sales from this time last year.

Clearly, the industry has experienced accelerated growth, but we believe the initiatives we have been implementing the past few years, along with our in-store execution of great customer service has resulted in our ability to sequentially increase our market share.

While our results were strong, our competitors also reported improving sales trends.

Our best estimate on the reason for the industry acceleration can be grouped into two categories.

Number one, extreme summer conditions that continued into the fall.

And two, the health of the consumer's pocketbook did not improve.

People continued to hold on to their vehicles and are focused on maintaining them properly.

To give color on the macro points, I'll highlight the mix of sales.

Our sales mix continued to be dominated by failure and maintenance-related categories and discretionary sales continued to grow, but at a slower pace.

While failure remains the largest mix at approximately 45% of our total sales, maintenance is at 40%, and not far behind.

Our sales growth acceleration started about two years ago now.

The change for our business was a change in customer account trends.

For many years prior, our customer count was declining on a same store basis.

That decline was somewhat structural, as technology was improving the quality and longevity of the products we sold.

However, those improvements came with incremental costs, and those incremental costs helped drive a long-term increase in average unit retail or average ticket.

A simple example is a spark plug category where spark plugs used to sell for r $1 or less a piece.

Today they are made of new materials that are much more expensive, but they burn hotter and last longer.

Platinum and iridium spark plugs today sell for $3 to $8, while a tune-up has been extended from 30,000 miles to 70,000 to 100,000 miles.

This quarter, our customer count and average ticket growth rates were similar.

We believe a substantial amount of the change in customer count growth is coming from the maintenance categories, as customers elect to take better care of their existing vehicles.

We also had weather patterns that have been favorable for our business in recent quarters.

This quarter the summer heat continued well into the quarter, and the conditions were generally dry.

It is inherently difficult to forecast the future, and fortunately, we don't have to have a precise forecast for an extended period of time.

We can quickly modify our plans, should conditions accelerate or decelerate from here.

That allows us to spend the vast majority of our time focusing on what we control.

Regarding our execution, we continue to believe that superior execution can be a sustainable point of differentiation.

In an industry where changes to vehicle technology, brands and systems are constant, we have been keenly focused on evaluating the most efficient ways that we can fulfill our customers' needs.

With our hub store conversions and continual refinements to our hard parts assortment, we've adding significant amounts of merchandise, and it's been selling.

Additionally, we have been very aggressively removing unproductive inventory from the system in an effort to make room for the later model parts we are adding.

We are also constantly refining our marketing efforts to identify a more effective and more efficient methods to motivate our customers to shop with us more frequently.

Additionally, we have been very focused on leveraging the Internet across a variety of fronts.

In the last two years, we have launched completely new web sites for both retail and commercial, with our new commercial site being launched just in November.

We have been pleased with our progress, but also understand that there are limitless opportunities for us to engage more effectively with our customers over the Internet.

Lastly, on the people front, we improved our training efforts and we have added AutoZoners to grow the business, both for retail and commercial.

Our second quarter has just begun, and we don't comment on intraquarter sales trends.

But I want to remind everyone that it is our seasonally lowest sales quarter and it is always interesting as it includes the Thanksgiving, Christmas and New Year's holidays and the weather patterns can be very different this time of year.

Next, let me update you on the initiatives we put in place for the new fiscal year that support our operating plan theme of One Team Going the Extra Mile.

Going the Extra Mile has been a very important part of our heritage for many years.

One Team was born of our desire to ensure that we were providing the very best customer service experience to every customer, regardless of how they interact with us.

Over the last year, we have been testing our One Team program in a select number of stores.

The results have been encouraging.

But we have seen a significant benefit across the stores that aren't on the One Team test program.

We have seen regions and districts develop their own One Team mindset, and that attitudinal shift has been a tremendous change for us, and is a key part of our success.

We will continue to streamline systems, remove obstacles and reinforce to all AutoZoners to always put customers first, regardless of how they interact with us.

But this year, One Team is taking on an even broader role.

It is permeating the entire organization, from regions helping regions to departments helping departments to businesses helping businesses.

It has a momentum of its own, and it is pulling our organization even closer than we have been in the past.

We have a tremendous unique culture, and One Team Going the Extra Mile will have long, positive lasting effects on our culture.

One Team Going the Extra Mile was supported by our 2011 key priorities.

One, great people, providing great service.

Two, continual refinements and improvements in our hub strategy.

Three, leveraging the Internet.

Four, profitably growing commercial.

Five, ever improving inventory management.

And finally, improved product assortments.

As we always do, we communicated our plans for the new fiscal year at our national sales meeting held here in Memphis in September.

Then, throughout October, we held regional meetings across the country to carry that message to additional leaders who weren't at the national sales meeting.

I personally attended many of these meetings, and I was very impressed by the professionalism of those meetings, but more importantly, by the great leaders we have, and by their enthusiasm and commitment level to our plans.

We definitely have great people providing great service.

On the hub strategy front, we relocated two hubs this past quarter and finished consistent with last year with 145 locations.

Our investments in the hubs have continued to put some pressure on SG&A as a percentage of sales, as only 71 of the 143 conversions were completed by the end of Q1 last year.

The hub stores continued to perform very well.

They have become a strategic asset for us, and as we mentioned last quarter, we have many of them that aren't large enough to accommodate our plans for them, or they're in the wrong location.

We are proceeding with our plans to right-size the hubs, and ensure they are in the right place as well.

This will be a multi-year effort, but we are pleased with the progress we have made to date.

Regarding the Internet, we continue to refine and update our retail website, including enhancing content.

As previously mentioned, we recently rolled out a completely new commercial website, and we are pleased with the enhancements to the site and with our customers' initial response.

Today, we have a very large share of the traffic in retail, but the consumer doesn't do a significant amount of purchases online or even buy online, pick up in store.

However, over time, as consumer behaviors change, and as we enhance our sites, we believe this is likely to continue to grow at a fairly rapid pace.

Today, many of our in-store sales are influenced by our customers' interaction with us over the web.

On the commercial front, our penetration of purchases is substantially behind others in the industry.

But we believe our new platform, combined with our knowledgeable sales force, can make up ground fairly quickly.

We've invested materially in this effort and believe it can be a more substantial piece of both retail and commercial in the future.

Lastly, I will reiterate, our organization has performed well and our financial performance has remained healthy.

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

Our team understands this industry and manages our resources well.

Our planning efforts are exceptional as we feel we have good visibility into business trends and our team is committed to managing to those trends appropriately.

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.

And we will continue with the strategy well into the future.

We should also highlight another strong performance in return on invested capital as we were able to grow this metric to 28.6% on a trailing four quarter basis, which represents another new all-time high for our organization.

We will always maintain our diligence regarding capital stewardship.

Now I'll take a few moments to talk more specifically about retail, commercial and Mexico results for the quarter, and then Bill Giles will review our gross margins, operating expenses, the balance sheet and cash flows.

For the quarter, total auto part sales increased 12.8% versus last year's first quarter's growth of 7.7%.

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

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

This quarter, we completed category line reviews in 15 of our 40 plus major merchandise categories.

Improving our parts coverage remains a key priority.

I'll break my remaining comments regarding retail sales up into a couple of major categories.

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

Training initiatives and the macro trends we've seen.

One of our key objectives is to make sure we are providing trustworthy advice to our customers.

A critical element in ensuring that is providing our AutoZoners with the tools and training to provide that great advice.

We've been very focused on upgrading many of the tools we provide to our AutoZoners, from Z-net to testing tools, and we have been expanding our focus on specific product category training.

Additionally, we have been enhancing our training for improved utilization of our hub stores and recently intensified our training on safety.

Regarding macro trends, during the first quarter, unleaded gas prices started out at $2.80 a gallon and rose slightly, finishing the quarter at $2.88 a gallon.

Last year, gas prices were stable throughout the first quarter between $2.59 and $2.64 a gallon.

As gas prices have remained relatively stable, we believe they were not a driver, positive or negative, to our sales results over the last quarter.

Although we are always mindful of the moves in oil prices and how they ultimately can correlate with prices at the pump.

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

Recently, July, August and September showed positive upward trends, up 0.8%, up 1.7% and up 1.5% respectively.

While recently we have seen minimal correlation in our sales performance as miles driven, historically it has been one of the key statistics which correlate to 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, it continued to have a positive impact on our results, as the country experienced much warmer weather throughout the summer and into the fall, and the effects continued to impact sales results the last few months.

For the trailing four quarters, total auto part sales per square foot were $251.

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 21%.

Our strong results, which began to accelerate in Q1 of 2010, continued in our first quarter.

As we have said previously, we have been very pleased with the progress we are making in this business, both operationally and financially.

We believe there are ample opportunities for us to continue to improve many facets of our operations and offerings, and, therefore, we are quite optimistic about the future of this business.

However, there are no silver bullets.

Our sales growth has come from both existing and new customers.

We continue to believe we can grow revenues in existing stores and we will continue to open additional new commercial programs.

This past quarter, we opened 54 new programs in markets we believe have strong potential.

We now have our commercial program in 2,478 stores, supported by 145 hub stores.

With just 56% of our domestic stores having the commercial program, we believe additional programs can and will be opened this fiscal year and beyond.

We remain committed to building a platform for long-term growth, growth in both sales and profits.

One of our main focus areas continues to be building and developing our sales force.

We congratulate our sales force of 240, plus, for their commitment to growing relationships across the country.

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

As I make sales calls with our territory sales managers, I have begun to see a real shift.

Several years ago, when we began creating the sales force, we made what I would call social calls.

Today, I see well-informed, highly trained salespeople who have a purpose for their visit.

Additionally, I see customers who appreciate the professionalism of our team and who also appreciate the comprehensive nature of our offerings.

Simply stated, our customers' receptivity to AutoZone is quite different than it was just a few short years ago.

In addition to our focus on further developing our sales force, we have continued to add significant resources to our commercial business from additional late model coverage, both in satellite and hub stores, and we've added additional labor hours and trucks.

Lastly, we mentioned on last quarter's call that we completed the store roll-out of our proprietary Z-net system for commercial.

This system better leverages the wealth of content we've made available and creates a common operating system platform that is considerably more intuitive to operate across both businesses.

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.

We've only just begun utilizing this tool in our stores, and it remains a key priority for us heading into 2011.

In summary, the commercial business remains on track, and we're excited about our continuing opportunities.

Our Mexico stores continue to perform well.

We opened three new stores during the first quarter and currently have 241 stores in Mexico.

We remain resolute on our strategy to open stores at a steady pace while managing our Mexico business for the long term.

Also, we continue to be comfortable with the foreign currency risk this business introduces.

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

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

Bill?

Thanks, Bill.

Regarding the first quarter, for the 12 weeks ended November 20th, we reported sales of $1.792 billion, an increase of 12.7% from last year's first quarter.

Domestic same store sales or sales for stores open more than one year were up 9.5% for the quarter.

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

Net income for the quarter was $172 million, an increase of 20.1%, versus last year's first quarter and diluted earnings per share increased 33.7% to $3.77, from $2.82 in the year-ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 28.6%.

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 50.7% of sales, up 33 basis points compared to last year's first quarter.

Improvement in gross margin was primarily attributable to an increased penetration of Duralast product offerings and lower acquisition costs.

In regards to inflation and its impact on comp store sales performance, we have not experienced any significant impact.

Although by category, there have been some fluctuations, taken as a whole, they have offset each other.

We do not expect inflation to play a large role in same store sales for this fiscal year, however, we cannot be sure as commodity pricing is the main driver in this area.

Thus far into the year, inflation has not had a significant impact.

Looking forward, we continue to believe there remains opportunity for gross margin expansion.

However, we do not manage a targeted gross margin percentage.

Instead, we're focused on growing absolute gross profit dollars.

SG&A for the quarter was 33.6% of sales, down 37 basis points from last year's first 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 incentive compensation costs, higher legal expenses, continued investments in our hub store initiative.

As our sales have improved, we have taken the opportunity to invest in expenses that we believe will help position the business for long-term growth.

However, we understand all expenditures must achieve an appropriate investment hurdle.

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

While our operating expense percentage growth has increased over the last two years, we continue to purposefully invest these dollars to position the Company for future sales growth.

This organization takes great pride in our disciplined approach to managing our cost structure, and leveraging our culture of thrift and remain committed to appropriately managing expenses in line with overall performance.

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

EBIT for the quarter was $306 million, up 17.5% over last year's first quarter.

Our EBIT margin improved to 17.1% or 70 basis points, versus the previous year's first quarter.

Interest expense for the quarter was $37.3 million, compared with $36.3 million in Q1 a year ago, a 2.5% increase.

This past quarter we issued $500 billion of new debt replacing $200 million of expirations, plus terming out some commercial paper.

As a result of this new debt, we expect our blended borrowing rate to increase in the future, and more specifically, expect our run rate on interest to be closer to a range of $41 million to $43 million in Q2.

Debt outstanding at the end of the quarter was $2.879 billion, or approximately $140 million more than last year's balance of $2.740 billion.

Our adjusted debt levels of 2.3 times EBITDAR are in line with past quarters' results.

As we 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 an 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 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%, in line with last year's first quarter of 36.1%.

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

Net income for the quarter of $172 million was up 20.1% versus the prior year's first quarter.

Our diluted share count of 45.6 million was down approximately 10% from last year.

Combination of these factors drove earnings per share for the quarter to $3.77, up 33.7% over the prior year's first quarter.

Relating to the cash flow statement for the first fiscal quarter of 2011, we generated $357 million of operating cash flow.

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

We repurchased $300 million of AutoZone stock in the first quarter, and at the end of the quarter, we had $385 million remaining under our share buyback authorization.

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

To date we've bought $9 billion of our stock back.

Accounts payable as a percent of gross inventory finished the quarter as just over 106% versus 97% in last year's first quarter.

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

We reported an inventory balance of $2.4 billion, up 4.4%, versus the Q1 ending balance last year.

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

At the same time, we believe there's further opportunity to expand inventory coverage in several categories.

Net fixed assets were up 7% versus last year.

Capital expenditures for the quarter totaled $46 million and reflected the additional expenditures required to open 18 new stores this quarter.

Maintenance on existing stores and work on development of new stores for upcoming quarters.

With the new stores opened, we finished this past quarter with 4,404 stores, in 48 states, the District of Columbia and Puerto Rico, and 241 stores in Mexico, for a total store count of 4,645.

Depreciation totaled $44.3 million for the quarter versus last year's first quarter expense of $42.6 million.

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

The Moody's investor service has assigned us a senior unsecured debt credit rating of BAA2, and a commercial paper rating of P2.

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

Now I'll turn it back to Bill Rhodes.

Thank you, Bill.

Before we conclude, I want to reiterate that our industry's performance has been strong for the last couple of years.

But I believe our team's commitment to our culture and our customers, combined with our initiatives, have contributed significantly to our success as evidenced by our continuing growth in market share in both retail and commercial.

We remain committed to continuing to improve our business model and our operations.

Continual refinements, but frankly, we are not making radical or high risk changes.

We have an exceptional business model that still has tremendous opportunities for further improvements.

For fiscal 2011, we will continue to focus on our key priorities, again.

Great people providing great service, continual refinements and improvements in our hub strategy, leveraging the Internet, profitably growing commercial, ever-improving inventory management, and improving our product assortment.

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

Our approach remains consistent.

We are focused on One Team, Going the Extra Mile in 2011, and we're in a solid position to do just that.

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

Thank you.

(Operator Instructions).

Our first question today is from Alan Rifkin with Banc of America.

Your line is now open.

Thank you very much.

Hey, congratulations on a great quarter.

First question for Bill Rhodes, if I may.

Bill, with respect to the One Team initiative, could you maybe just describe in a little bit more detail what the costs associated with this program are, when you expect those costs to reach their peak, if the initiative continues to go as planned.

And maybe if you will, just quantify a little bit more some of the net benefits at the store level that you're seeing.

Thank you very much.

Sure, Alan.

Thank you for your comments.

First of all, there's two different ways to talk about this One Team.

First of all, we have a test in a very small set of stores where we've enacted the One Team approach.

And basically what that means is we bring the commercial desk out on the counter.

And so there's some very minimal costs related to relocating that commercial desk.

But then they function as One Team and they can, from that counter, anybody can service commercial or retail.

The bigger part of it is this whole attitudinal shift in our organization of everybody chipping in.

We're not looking inside the organization as I'm responsible for commercial or retail or ALLDATA or Mexico.

We're all focused on one team.

That's really been the surprise to me and it's one of those things that built momentum on its own.

Going back to the first one, I don't know what the timing of roll-out on it will be or what the cost will be.

It's really too early.

We're about the roll out the next set of test stores to see where we go from there but as that changes, we'll let you know as we have more clarity on it ourselves.

Okay.

Question for Bill Giles.

I believe you said that the continued roll-out of the hub program did pressure SG&A.

Would you be able to quantify what that pressure was in the quarter and would it be reasonable on our part to expect that pressure should really subside going forward now that the program is fully rolled out?

Yes, I think if you think about it, we had about a fully rolled out the program today, although in Q1 of last year I believe about 71 of the programs were rolled out.

So we're anniversarying some of that impact.

It was about an 18 basis impact on SG&A this quarter, and it's safe to assume as we migrate our way through, completely through the end of this year, that will begin to subside as we anniversary the roll-out of that program.

We did a lot of those in the fourth quarter of last year.

Okay.

And one last question, if I may, maybe for Bill Rhodes.

Bill, with such great success in the commercial side, revenues up 21%, could you maybe just articulate where that growth is coming from?

Are you seeing accelerated growth from new accounts or are you seeing greater penetration from already existing accounts?

Thank you very much.

That's a great question, Alan.

We're seeing it across the board.

We track it from existing customers and what kind of growth are we seeing from them.

That's improved.

We're tracking new customers and what are we getting from those customers and that's improved.

And as importantly, we also unfortunately lose customers.

And our trends in lost customers are also improving, so it's across the board.

Our team, both the field and sales -- field sales and operations team and the sales force are doing a great job of really getting out there and I talked about the sales calls that I've been on recently, and the mindset shift of our sales team members and the receptivity of the commercial customers is just so vastly different than it was three years ago.

So I'm continuing to be very excited about the future.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question is from Greg Melich with ISI.

Your line is now open.

Hi.

Great.

I have a couple questions.

First, Bill, you had mentioned in your opening comments that you didn't want any false constraints in terms of growing either the retail or commercial side of the business.

Could you just elaborate a little bit what a potential false constraint would be?

People have asked us.

I wanted to make sure and clear that up because people asked us are you trying to be a 50/50 split or a 70/30 split?

I don't care what the split is.

I don't want us -- I don't want to put false constraints on the organization to think we need to prioritize this business over that business.

We need to have maximum market share in each of those businesses, as long as we can do it profitably.

Great.

And over to Bill Giles.

You had mentioned I think that gross margins were helped by Duralast expansion.

Could you just give us a little more color on that in terms of what private label penetration is now, and if there were any sort of categories that were particularly strong that drove that?

Actually when you think about it, a lot of failure related categories actually had pretty good improvement overall and we have a lot of Duralast private label branded product in those categories so we actually increased that.

And as you look forward, you know, we continue to believe that there's opportunity for us to find opportunities to introduce Duralast brand in other categories.

But clearly, wiper blades is a great example of where we've introduced Duralast brand and have had great success with that and overall the customers have great acceptance of duralast products and that continues to increase its penetration.

Specifically in the quarter, was it more the mix shifting to categories where Duralast is strong or was the launch of new extensions in the categories, like wipers, that drove it.

I would say it's more of the launch of some of those things like wipers and a few categories within failure related progress that actually increased.

It's an example of our ability to continue to promote the Duralast brand into other categories.

Got it, and then if I could, a last quick one, since you guys brought it up, traffic versus ticket, going back over time, easy if you just gave me the traffic or gave us the traffic and the ticket.

So would you do that?

If not, I have a --

I think we kind of did.

We said they were basically consistent.

They were consistent.

And if you were to compare the change versus three years ago, sort of longer term --

It's all in traffic.

It's all in traffic.

So at the end of the day people aren't spending that much more, it's just they're coming more.

Yes, I mean, the average tickets may be going up an extra 1% or down 1% from quarter to quarter, due to changes in commodities or whatever the case may be, but the real change has been in the customer count trends.

Got it.

Great.

Thanks a lot.

Great quarter.

Thank you.

Thank you.

Our next question is from Tony Cristello with BB&T Capital Markets.

Your line is open.

Good morning, gentlemen.

This is Alan Hatzimanolis in for Tony.

First question for BIll Rhodes, out of all of the changes in investment that you have made to your commercial business over the past few years, which do you believe has made the greatest contribution in improving the receptivity of your installer customers to doing business with AutoZone.

That's a great question.

All of them.

I really mean that.

If we would have done one without the other, it wouldn't have worked.

That's been the beauty of this program.

For a while we had a sales force a number of years ago, but we didn't have the foundational elements in place.

We didn't have the right parts coverage.

We didn't have the right service model.

And then we didn't have somebody out telling our story.

If we did one without the other it wouldn't work.

The beauty of what we've done is it's been holistic.

It's been focused on the customer and it's been sustainable and I think that's been the big change.

Okay.

Just as a follow-up, I think, Bill, that you indicated last quarter that with the new commercial Z-net, the number of steps required to place an order dropped north of 20 to just four.

As your store level employees become more accustomed to the software, do you plan on realizing efficiencies in terms of lower cable levels, or rather, would you anticipate that the increase in disposable time will be focused more on outbound sales calls and other efforts to broaden the numbers of shops you do business with.

I think the biggest benefit is it reduces the amount of time you have to trans act business with your customers.

So if the customer is sitting there, if you have to go through 20 steps, it's a little bit frustrating to them.

The amount of time, we're not ever going to see that time in payroll because it's such small amounts.

But it will allow them more time to help DIY customers make outbound sales calls, work on inventory management, whatever the case may be.

One other point too is that Bill talked about before, about the One Team concept where we've got commercial out on the desk and being able to have DIY and commercial being serviced the same, the simplicity of the system really allows more people to operate the system.

Before it was too complex,and now it's very intuitive and very similar to the way our DIY Z-net system works.

Okay, and maybe one last question, if I could, looks like this was the second quarter where increased legal expenses year-over-year were called out as a drag on operating expenses.

Can you give us a sense of what is behind this, and should we expect this type of year-over-year increase until it cycles in Q4 2010 levels?

It really is primarily concerned with one particular case.

We're involved in cases all the time, and we continually evaluate them and then we adjust the reserve based on facts and circumstances during the quarter, so that's really what transpired this quarter.

Okay.

Great.

Thank you very much.

Thank you.

Your next question is from Aram Rubinson with Nomura Securities.

Your line is now open.

Hey, everybody.

Good morning.

Good morning.

Two things.

One, a question on the operating cash flow.

It appears like for this quarter that the operating cash flow was greater than the EBITDA for the first time at least in history that I've seen.

Just wondering if there's anything kind of one time in there or seasonal in there to think about.

And then I had a follow-up.

I don't think there's anything really one time necessarily, Aram.

I think that we've continually done a pretty good job between inventory and CapEx might have been a little bit lighter this quarter, but not dramatically.

I don't think I would think about it as a one timer.

And then your neighbor in Tennessee and I know you guys know them really well, Dollar General, kind of yesterday on their conference call said they were looking to use some cash to buy back some of their leases and own more stores.

I know you own already a good portion of your stores.

Wondering in terms of use of proceeds from the cash flow you're generating, where that fits or if you thought along the same lines as they are?

We have and we have for a while.

We continually go back and identify opportunities to renegotiate leases that are coming up given the environment that we're operating in today from an economic standpoint.

We're also taking opportunities to buy up leases where we think it makes economic sense for us so we continually evaluate the exact same thing.

Is that presenting kind of an incremental value as they seem to suggest.

I think it's a slight incremental value and obviously we only do it where it makes sense.

We're not doing a significant number of them.

But we are finding opportunities.

Okay.

Thanks, good luck.

Our next question is from John Lawrence with Morgan Keegan.

Your line is now open.

Good morning, guys.

Good morning, John.

Just quickly, Bill, when you talk about inventory, I mean, I know you spent a lot of time the last several years with line reviews and preparing for commercial and adding inventory, but how does this macro environment that we have today with more miles on the cars, how does that change your merchandise mix as you look longer term and trying to plan these hub stores for appropriate levels of inventory?

Are we seeing a consumer shift down?

Or what's been the pattern of -- if you dive into the product mix?

That's a great question.

First of all, makes you take another look at how quickly you want to exit product categories because vehicles are being held longer.

If anything, the bell curve is getting flatter or wider so you're having to re-evaluate when you want to exit certain categories.

But the beauty of the model that we have in place today with the hub stores is that we don't have to replicate that inventory coverage in 4,400 stores.

We can put it in 145 stores and then leverage it in those 4400 stores.

So I talked about the importance of this program that we have on our hub stores to right-size them and make sure that they're in the right place.

That's going to be a very important part of our strategy as we go forward.

It's going to take us a while.

We have a significant number of hub stores that frankly don't have the product offering that we want today because they're simply too small.

And so we're going through a process where we're going to expand some of them in existing locations.

We're going to relocate some of them to larger locations and then relocate some of them, put them in the proper retail and commercial center locations.

And secondly, Bill, I was intrigued your comments about online, that customer.

Can you talk a little bit about -- obviously the online business for auto parts is fairly small today.

Going forward, what do you think are the attributes or the things that have to happen to make that grow going forward and why are you optimistic about you can deliver that?

I think one of the things Bill mentioned before is that large portion of our customers get online to get information about the part and availability and to some extent, pricing before they come to the store.

And so we've seen our visitors increase, percentage of visitors increase significantly over the last year, and so what we're aimed at is having a seamless shopping experience for our customers so they're able to shop online if that's convenient for them or to get online and get a significant amount of information about the product.

They can also get online and retrieve repair information and provide them with a wealth of information over and above what we can give at the counter.

It's all about trustworthy advice.

It's also about expansion of assortment as well.

So obviously online we have the ability to provide a larger assortment than we do inside the box.

Again, we want it to be a seemless shopping experience.

We want to be able to continue promote trustworthy advice and we're getting a significant amount of customers coming to our site and that's increasing so we know we're doing something right.

Congratulations, guys, thanks.

Thank you, John.

Our next question is from Kate McShane with Citigroup.

Your line is open.

This is [Ivan Holmes] sitting in for Kate.

Congratulations on a great quarter.

My first question kind of touches upon market share.

We were wondering where are you taking share from?

Where do you think your largest opportunities are in terms of continuing to gain share?

Mostly coming from larger competitors or the smaller mom and pop shops, dealerships?

Where do you see opportunities?

I'll try.

Having a little bit of trouble hearing you.

But your question was regarding share.

I'll start with commercial.

Commercial, our share is miniscule at this point in time.

So it's not about how large our share, where it's coming from.

We're really in the introductory phase in commercial but we're introducing ourselves very fast and very well at this point in time.

To retail, I think it's certainly a more important gauge for us.

When we talk about share, we're referring to NPD market share and really only the larger competitors are the only ones participated in NPD today.

When we say we're gaining share in retail and commercial it's versus the remaining market that contributes to NPD.

And there's about eight or nine companies that contribute to that.

I do not know, although I expect we're gaining share versus the mom and pops and the other parts but I can't confirm that with data like we can with NPD.

The NPD information on where we're gaining share in the retail business is in virtually every geographic area and then almost virtually every category.

So it's across the board.

And obviously we're gaining some of that share because we're expanding our number of outlets but I think we're gaining it because we've got the right product assortment and the right service model.

Great.

Thanks a lot for the clarification.

And a quick follow-up, if I may.

With regards to private label penetration, as you're ramping up your e-commerce platform, can you provide some color if there's any difference in terms of penetration rates in the stores versus on the e-commerce website and how you expect that to evolve?

Thank you.

We don't expect to see any difference.

The product offering is going to be relatively similar, albeit slightly expanded on the e-commerce side.

Again, it will be the same representation and as we mentioned before, Duralast is a great branded product and is very well received by the customers, both online and at the store.

Thanks.

Thank you.

Our next question is from Scot Ciccarelli with RBC Capital Markets.

Your line is now open.

Hey, guys, how are you?

Great, how are you, Scott?

Not too bad.

You guys are obviously doing a lot of good things.

You're putting up good results.

But you also mentioned, Bill, the positive impact that weather had on your business, a couple of times during the call.

I'm just wondering when you look at the composition of your sales, is there any way to put an estimate on the impact that weather may have had?

I know over the long term, it's going to balance itself out but just trying to figure out kind of what the impact was this particular quarter?

Yes, it's very hard to determine a specific amount.

And we have some outside sources that help us try to estimate it.

But again, I'll highlight that it's an estimate.

But you can think about it being maybe 20% or so of our growth of same store sales.

Okay.

That's helpful.

And then I guess my next question is, you had talked about, you're still seeing the strongest growth rates in both the failure and maintenance categories, kind of a little bit softer in the discretionary.

That makes sense.

Kind of similar to kind of what you've been seeing for a while.

Are you willing to put kind of growth rates on those different categories at this stage?

Looking forward?

No, kind of what we've seen in terms of the -- is it failure is, I don't know, comping at a 12% rate, maintenance is a 9% rate?

Is there any better way to kind of create the ranges or let us think about the ranges.

I don't think they're probably as wide as you're thinking necessarily.

I think failure related parts are growing at a faster rate than the other one.

Everything is growing.

It's not as though something is negative, necessarily.

They're all growing at a healthy rate and failure is growing probably the fastest followed by maintenance.

Thanks a lot, guys.

Thank you.

Our next question is from Michael Lasser with Barclays.

Your line is now open.

Good morning.

Thanks a lot for taking my question.

Bill, if I paraphrase some of the comments you made earlier, a few years ago technological innovation led to a lull in the industry as some of the products that lasted longer meant that demand suffered a little bit.

Is there any evidence that a similar trend might occur this time around, rather on the product side, on the consumer side as we're seeing a release of pent-up demand, as some of that work gets done that will lead to slower trends, have to make some of those investments in the next year or so?

I'll start with the technological phenomenon is still ongoing today.

You take carburetors and fuel injectors, there's 1,000 examples of where the systems on the vehicle have changed, and the failure rates have been reduced, but the costs of those products are so much more.

But what's changed now is the customers' behavior.

The customers are more focused on maintaining their vehicles today than they were three or four years ago.

And if you go back to that period of time, maybe there were more headwinds out there than we realized.

Maybe new car sales were more of a headwind.

Maybe people were turning their cars more frequently, therefore they weren't maintaining them at the right level.

Certainly when gas prices got over $4 a gallon, that was a major headwind.

But I think that there's been -- obviously you've seen it.

We've gone through the Great Recession.

It's the toughest economic times that this country's ever seen since the Great Depression.

I think people have changed their mindset and they changed their mindset how they deal with debt.

They've changed their mindset with how they deal with one of their most valuable assets, which is their vehicle and although we don't know what the future's going to hold, my suspicion is that there's going to be some long-term benefit that's going to be positive for our industry out of people focused on taking better care of their vehicles, and not buying and selling them as frequently.

It's very helpful.

Second question, as you reflect on the wave of the growth the industry is seeing over the last few years, have you seen any changes in the competitive behavior of the other players from then until now?

Well, first of all, I think our competitors are very good competitors.

They run very good businesses.

I wouldn't say that their business models have changed materially.

Not in the way that we've seen them out there, but they're very good at what they do and they're getting better every day and if we don't get better, they're going to catch up to us.

So it's on us to get better.

Okay.

Good luck with the rest of the year.

Thank you.

Thank you.

Our next question is from Matthew Fassler with Goldman Sachs.

Your line is now open.

Thanks a lot.

Good morning and congratulate is on a strong quarter.

Two questions.

The first is just a follow-up on the Internet business and as you've spoken about it I think you've spoken about it largely in a B to C context.

It would seem there's a huge cost opportunity at least in terms of B to B and commercial customers.

As you're getting much deeper penetration with the commercial customer base, what's your sense for their appetite, or at least their receptivity to movement here and do you think being first to market with a great platform would be an asset in that space?

Yes, I mean, just to be clear, we're not first to market necessarily.

I mean, there's others that have much higher penetration.

But we believe that with the new platform that we've launched and the receptivity that we're seeing, we have significant opportunity to increase our penetration on that side of the business.

We do see good receptivity and I think that the customers are continuing to migrate to that.

And it's going to be a shop by shop event, because some shops only deal in electronic ordering and others simply don't, but one thing for sure is that it certainly allows us an opportunity to garner market share, particularly with those shops that are very focused on electronic ordering but I do think long-term that the penetration will continue to increase and it will become a much more acceptable way of conducting business for even the up and down the street shops.

Got it.

And sorry, is there a real cost advantage to you?

Is there a real cost advantage to you for --

I don't think there's a significant cost advantage.

I think it's more about our ability to be able to streamline the process for both the customer and ourselves.

There's probably some.

It's too early to quantify what that would be but the real focus on what we're trying to accomplish is providing our customers who choose to shop that way or execute their business that way a great platform by which to execute it.

Great.

My second question just relates to the underlying SG&A run rate.

Obviously, you had the kind of quarter that gives you the opportunity to put a lot of money to work in a lot of different initiatives and incentive compensation.

If you think about an environment where sales might not be as robust and doesn't seem like that's the case right now, what kind of underlying SG&A growth should we assume as sort of the normal steady state for you?

I think that the one thing that the organization has demonstrated over time if you look over the last year or two or five years is an ability to manage the cost structure in accordance with sales environment that we're operating in and if you look over the last year, you're right, we've had a great opportunity to be able to invest in some initiatives that we believe are actually contributing to the results that we're experiencing today.

And so we're going to continue to manage it that way.

And at the same time, allow ourselves to be nimble so that we can pull back where we need to, if in fact sales were to change.

Got it.

Guys, thank you so much.

Thank you.

Thank you.

Our final question today is from Christopher Horvers with JPMC.

Your line is now open.

Hi, it's Mark Becks on for Chris.

Coming back to the hub store expansion, do you guys have an idea at this point, I think you did two relos of the hub stores this current quarter, what kind of numbers behind potential relocations or additional sizing.

We do have numbers, particularly on the additional sizing, more so than the relos because we know today what products are not in the stores that we want in the stores and they're in other hub stores and we can see what their performance is like.

Obviously we're not going to share what those numbers are but they are certainly sufficient to allow us to move forward with a relocation or expansion strategy on virtually all of the hubs that we have today and that will allow us to achieve a reasonable IRR in excess of our hurdle rate.

We're very excited about it.

We have good visibility into what we think is going to happen because of the other hubs and we're working very rapidly to make it happen.

Okay.

And just kind of switching gears, the acceleration of comps that you spoke to that being from execution and perhaps I was wondering if you're seeing anything on that end, maybe from a better customer, the customer feeling a little bit better about their pocketbooks.

I wouldn't say that.

I think obviously our business took off when they got more concerned about their pocketbooks.

I haven't seen or I don't think we've seen any material change in their mindset over the last six to nine months.

I think our traffic continues to be healthy and we're obviously experiencing new people into the industry and given the mix of sales that we have from a product perspective, we're probably seeing customers that are actually doing more failure related work than they have in the past.

Okay.

Just, finally, speaking to the discretionary, looked like it was flat, 15%, is there anything that you're maybe seeing in your business now that would lead you to believe that the typical seasonality would be anything different going forward?

No.

No, not at all.

As you would expect, discretionary categories are discretionary by nature and in this time of economic challenge, people aren't as likely to change out their floor mats or to do other discretionary things.

Great.

Thanks.

All right.

Thank you.

Thank you.

I would --

Go ahead.

I would now like to turn the call back over to Mr.

Rhodes for closing comments.

Okay.

Thanks.

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

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

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

Our culture remains one of our key points 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 we're excited about our opportunities.

I want to stress this is a marathon and not a sprint.

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

Lastly, I would like to wish everyone a very happy holiday season and a prosperous New Year.

Thank you for participating in today's call.

Thank you for participating in today's conference.

This does conclude today's call.

You may now disconnect.