汽車地帶 (AZO) 2011 Q3 法說會逐字稿

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 [second]-quarter financial results.

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

The conference call will end promptly at 10.00 a.m.

Central Time, 11.00 a.m.

Eastern time.

Before Mr.

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

Certain statements contained in this press release are forward-looking statements.

Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, and similar expressions.

These are based on assumptions and assessments made by our management in light of experience, perception, 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; [RF] 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 and 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 28, 2010.

These risk factors should be read carefully.

Mr.

Rhodes, you may now begin.

Good morning, and thank you for joining us today for AutoZone's fiscal 2011 third-quarter conference call.

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

Regarding the third quarter, I hope you've had an opportunity to read our press release and learn about the 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 another very strong quarter of performance financially and operationally.

Our EPS for the third quarter increased by 28.5%, another exceptionally strong quarter for us, as our domestic same-store sales increased 5.3%.

This marks the 10th consecutive quarter of EPS growth in excess of 20%, and the 19th consecutive quarter of double-digit EPS growth.

I'd like to start our call this morning by thanking all our AutoZoners across North America for their continued efforts on our "1TEAM Going the Extra Mile" 2011 operating theme.

We have made consistent progress on each of our initiatives, which include hiring, retaining, and training the best AutoZoners; enhancing our hub network; leveraging the Internet; profitably growing commercial; and improving our product assortment and inventory management efforts.

I'll go into more detail later on many of these initiatives.

Our focus remains on the fundamentals.

We're committed to having the right AutoZoners providing the right customer service, along with the right products at the right price every day.

Our past successes give us confidence that our strategies have and will continue to position AutoZone for continued growth, both in sales and earnings, in each of our businesses -- domestic retail, domestic commercial, Mexico, and ALLDATA.

Regarding our third-quarter sales results, our total auto parts segment, made up of both our domestic and Mexico businesses, delivered an 8.5% increase.

Our other businesses, made up of ALLDATA and e-commerce, were up 12.5%.

According to NPD data provided to us, AutoZone continues to gain market share in both the domestic DIY and DIFM market segments.

This data gives us great confidence in our strategies and their implementation, and strengthens our commitment to staying the course.

Existing customers and new customers are shopping with us because of the perceived value of their comprehensive experience with us.

However, we know there are alternatives.

That is why we focus on not only improving inventory coverage and our ability to say yes more frequently, but also on delivering trustworthy advice.

In the end, it is our strong culture of providing wow customer service that differentiates us in the marketplace.

Over the last several quarters, not only have we delivered EPS growth in excess of 20% each quarter, we have increased our investment in areas we believe will drive long-term growth.

We have continued to open new stores both in the United States and Mexico at a combined annual growth rate of approximately 4%.

We've expanded our emphasis on hub store operations, and are relocating or expanding many of our hub stores in order to ensure they have the physical capacity to execute the vision we have for them.

We have made considerable investments in our commercial business -- expanding our sales force, improving our technology, opening new programs at an accelerating rate, and increasing labor.

We've also intensified our training efforts and added labor in other specific areas.

Finally, we have continued to refine our merchandise placement efforts, adding more late-model products while continually reducing less productive inventory.

While many of these efforts aren't radical shifts from our historical efforts, combined, they have been significant, albeit low risk enhancements to our offerings.

Our objective with these efforts is to create differentiation in the customer's eyes.

Based on the NPD market share information, which shows us continuing to grow share year-over-year in both DIY and DIFM, we believe these efforts are meeting our objectives.

We will continue to make constant refinements to each of our businesses that result in meaningful improvements in the customer experience, although I wouldn't expect any radical departures from the past.

I'll take a moment now to talk more specifically about our third-quarter performance in a little more detail.

As I mentioned, our domestic same-store sales grew at 5.3% for the quarter.

Our third quarter, which ended May 7, experienced a high degree of variability and sales results from week-to-week and region-to-region.

The severe weather in January during the latter part of our previous quarter abated in February; but spring-like conditions were delayed, as extensive rains, some flooding, and cooler temperatures persisted across much of the country in March and April.

I should note that some regions that were less affected by unusual weather patterns performed better.

Our increased emphasis on the commercial business again resulted in quite impressive results.

Our third-quarter commercial sales growth of 22.8% represents our largest rate of growth in recent history.

This represents our fourth straight quarter of 20%-plus sales growth and our 10th straight quarter of accelerating sales growth rate in this sector.

The fact that this quarter was our highest rate of growth is even more impressive when you consider that the comparison was against a 15.5% sales growth in the third quarter last year.

Although we are pleased with our commercial rate of growth, we recognize that we currently have a small percentage of market share, which represents a tremendous opportunity for us.

Therefore, we have and expect to continue to invest in order to grow sales and further capture profitable market share.

This includes expanding our sales force, increasing labor hours, expanding parts coverage, and enhancing technology -- all in the effort to improve the customer experience in order to become the provider of choice.

As we accelerate our investments to grow commercial and as commercial becomes a larger portion of our overall business, our SG&A and gross margin rates likely will continue to come under some pressure as these sales currently deliver lower margins.

However, as we've stated in the past, as we grow commercial, we are focused on growing operating profit dollars at strong levels of returns on the capital we deploy.

I'd also like to recognize our other businesses, ALLDATA and e-commerce, for having another fine quarter, up 12.5% in sales from this time last year.

Now let me give some color on the mix of our sales.

The mix continued to be led by failure in maintenance-related categories, as discretionary sales were a smaller contributor.

Failure remained the larger largest portion at 44% of our total sales, up from last year's third quarter.

What is important to highlight for this quarter was a slight decline in sales of maintenance and discretionary categories.

Both were down approximately 1% in their mix percent.

Going back to my previous comments on regional discrepancies in sales results, it definitely appeared maintenance-related products were challenged more so in markets where the weather was cooler and wetter, while markets with more normalized weather patterns performed better.

Again, customers just weren't working on their cars as much in these wetter and cooler environments.

I should point out as well -- discretionary categories are not immune from these regional variations, as it appears customers deferred the usual spring-cleaning on their cars in some regions.

This quarter, regarding our customer account and average ticket growth rates, average ticket remains strong, better than previous quarters.

However, transactions, while still positive, were lower than last quarter's growth rates.

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.

We have been pleased with the enhancements we have made to our hubs over the past year, along with improved inventory coverage.

In addition, with the average age of cars on the road increasing the last few years, we're seeing the distribution by age of parts sold widening at both ends.

While a seven-year-old and older vehicle is our kind of vehicle on the retail front, it is noticeable to us that customers with considerably older than seven-year-old vehicles remain key customers for us.

The demands from our commercial customers continue to offer us opportunities to drive parts additions earlier in the vehicle lifecycle, which benefits both DIY and DIFM.

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

While last quarter, we discussed with you new Internet initiatives, this quarter, we let those programs further develop.

We want to grow sales in the direct-to-customer and direct-to-installer segments, and we've seen significant growth in both segments.

We've been pleased with our progress on developing our Internet offerings, but we are in the very early innings of tapping into these growing customer segments that utilize this venue for ordering their parts and products.

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

Next, I'll give an update on our 2011 initiatives that support our operating plan theme of 1TEAM Going the Extra Mile.

1TEAM is about our desire to ensure that we're providing the very best customer service experience to every customer regardless of how they interact with us.

This effort is around streamlining systems, removing obstacles, and reinforcing to all AutoZoners to always put the customers first, regardless of how they interact with us.

1TEAM Going the Extra Mile is supported by our 2011 key priorities.

First, great people providing great service.

Second, continual refinements and improvements in our hub strategy.

Third, leveraging the Internet.

Fourth, profitably growing commercial.

Fifth, ever improving inventory management; and sixth, improved product assortment.

Let me go into a little more depth on our hub initiatives.

At this time a year ago, we had completed 108 hub store conversions out of our hub base at the time of 145.

By the end of our fiscal year in August, we'd converted all of our remaining hub locations to multiple daily deliveries for their respective satellite stores, though we have yet to fully anniversary the changes we made last year.

As we discussed previously, the next phase is to expand many of our current hub stores, which currently are space-constrained.

We have expanded or are in the process of expanding or relocating approximately 20 hub locations.

While the hub conversions and their enhanced delivery model have created some pressure on SG&A as a percentage of sales, we see that pressure generally abating by the end of the fiscal year as we anniversary these conversions.

Overall, we are quite pleased with the performance of our hub stores.

We continue to deploy new domestic and import parts coverage in our hub stores to be able to say "yes" even more frequently.

Parts proliferation in our industry is not stopping, and our hub initiatives are allowing us to more strategically deploy our inventory assortments.

I want to reiterate, while our financial performance has been solid, we take nothing for granted.

Our commitment to our ongoing planning efforts allows us good visibility in the business trends, and our team is committed to managing those trends appropriately.

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

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

We should also highlight another strong performance and return on invested capital, as we were able to grow this metric to 30.2% on a trailing four-quarter basis, which represents another new all-time high for our organization.

One of the big drivers for this growth has been the EBIT growth of the commercial business.

While having a lower EBITDA margin as a percentage of sales, which creates some margin rate pressure, the capital requirements of the commercial model are minimal.

The investments are mainly operating expense-related -- AutoZoners who develop relationships and sell to our customers, and other AutoZoners who provide great service to those important customers.

The ability to leverage our existing assets, primarily store locations, inventory and information systems, across this additional customer base, provides us with a terrific opportunity to grow operating profit dollars and drive incremental returns on capital.

It should be reiterated -- we will always maintain our diligence regarding capital stewardship, as the capital we spend is our investors capital.

Before I ask Bill Giles to take over the commentary, I know many are concerned about the industry's ability to manage through the higher gas prices we're seeing at the pumps these days.

It takes disposable income out of the pockets of our customers and everyone's pockets.

The best answer I can give came from a field sales leadership call we had a couple of weeks ago.

In this open forum, not a single senior field AutoZoner mentioned the price of fuel as the primary reason for customer concern and sales results.

While I don't want to downplay the prices at the pump, we have to market accordingly to help educate consumers on what they can do to save money every day.

As gas prices have only this past week have come down, we cannot rely on external relief.

We must remain proactive.

We continue to remain bullish on our industry's growth prospects.

We believe many of the same dynamics that were in place last year affecting our customers exist today.

At the same time, our financial modeling efforts are always based on conservative assumptions.

But our industry remains extremely fragmented in DIY and especially in DIFM.

We see the smaller players in our space remain under pressure from the larger players.

And this is no different than other categories.

I think it is important to remind everyone -- when we discuss NPD market share, those statistics represent only the small set of large players in the industry who report their sales information to NPD.

There is a much larger share, both in DIY and especially DIFM, that is outside of NPD.

We want to continue to gain share in both the share that is included in NPD as well as the significant business that is excluded from that data set.

And while we have great respect for all of our competitors, the past results show we are continuing to gain share year-over-year.

Now I'll turn it over to Bill Giles to talk about our financial results for the quarter.

Bill?

Thanks, Bill.

Good morning, everyone.

To start, let me take [you] a few moments to talk more specifically about our retail, commercial, and Mexico results for the quarter.

For the quarter, total auto parts sales increased 8.5% versus last year's third quarter's growth of 10%.

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

This quarter, we completed category line reviews in 12 of our categories of our 40-plus major merchandise categories.

Improving our parts coverage remains the key priority.

Regarding macro trends, during the quarter, unleaded gas prices started out at $3.14 a gallon and rose steadily, finishing the quarter at $3.97 a gallon.

Last year, gas prices rose during the third quarter, starting at $2.61 and ending at $2.91 a gallon.

As Bill mentioned, the increase in gas prices is reducing discretionary spending for all consumers and, particularly, our customers.

At the same time, it is an opportunity for us to communicate with our customers, steps they can take to improve their gas mileage.

We remain mindful of the moves in oil prices and how they ultimately can correlate the prices at the pump.

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

Recently, January and February showed positive upward trends, up 0.2% and 0.9%, respectively.

March showed a decrease in miles driven of 1.4%.

While recently, we have seen minimal correlation in our sales performance with 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.

For the trailing four quarters, total auto parts sales per square foot were $257.

This statistic continues to set the pace for the rest of the industry.

For the quarter, total commercial sales increased 22.8%.

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

For the third quarter, commercial represented 13.5% of our total sales.

While last fiscal year, we generated $880 million in commercial sales, I'm proud to report this morning we crossed over $1 billion in sales for commercial on a trailing four-quarter basis.

Our entire organization is proud of this accomplishment, but we realize we have much work to do as our market share remains small.

As we have said previously, we've 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.

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 commercial programs.

This past quarter, we opened 34 new programs.

Year-to-date, we have opened 131 new programs, a substantial acceleration from last year's 32 at this time.

We now have our commercial programs in 2,555 stores supported by 143 hub stores.

This past quarter, we consolidated two hub locations into one; therefore, our hub count declined by one.

With just 57% of our domestic stores having the commercial program, we believe there's ample opportunity for additional program growth.

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

Our focus this past quarter was to build upon the commercial initiatives that have been in place for well over a year.

We continue to watch our sales force mature from its inception just three years ago.

We are also training and introducing additional technology to optimize the productivity of our sales force.

We have increased our efforts around analyzing customer purchasing trends and in-stock trends.

We've had 16 consecutive quarters of sales growth.

We have a model that is successful and we are continuing [to test] additional enhancements to our offerings.

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 import and domestic coverage, both in satellite and hub stores, [through] additional labor hours and trucks.

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 12 new stores during the third quarter and currently have 261 stores in Mexico.

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

We've operated stores in Mexico for just over 11 years and believe there is opportunity for continued growth there as well.

Our returns in profit growth [is then] in line with our expectations, and our customers as well as our employees have embraced the AutoZone culture.

Based on how well our business model has performed in Mexico, coupled with significant research, we are currently evaluating the potential to open and operate stores in Brazil.

This is in the early stages and we do not expect to make a material investment in Brazil in the short-term, nor do we expect related activities there to have a material impact on our operations or our financial results.

However, we are excited about the possibility to expand our footprint outside of the US in a measured and prudent manner.

But just to be clear, this initiative will not be material for the foreseeable future.

We wanted to mention it because it is something we are working on, and we wanted you to hear it from us directly.

Recapping our third-quarter performance for the Company, in total, our sales for the third quarter were $1,978,000,000, an increase of 8.6% from last year's third quarter.

Domestic same-store sales or sales for stores open more than one year were up 5.3% for the quarter.

Gross margin for the quarter was 51.2% of sales, up 57 basis points compared to last year's third quarter.

The improvement in gross margin was attributable to lower shrink expense and higher merchandise margins.

Shrink results continue to be favorable.

Our field and loss prevention teams have undertaken several initiatives over the past few years that have led to improving our results.

While we have benefited the last two quarters from lower shrink expense, we recognize savings only after we physically counted our stores and distribution centers, and there can be no guarantee that this trend will continue, although we are pleased with our results to date.

The increased merchandise margin benefited from increased penetration of higher margin product as well as improved inventory management.

This is [then] offset in part by higher acquisition costs.

In regards to inflation, we have seen some rising costs and commodity-related products, although certain categories experienced some higher levels of inflation.

Taken as a whole, inflation hasn't been a material component of our overall results.

We will remain cognizant of future developments regarding inflation and will make the appropriate adjustments should they arise.

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

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

We are focused on growing absolute gross profit dollars, and gross profit dollars in our total auto parts segment were up 9.8% for the quarter.

SG&A for the quarter was 31.4% of sales, up 24 basis points from last year's third quarter.

The increase in operating expenses as a percentage of sales was primarily the result of increased investments in our hub store initiative and higher fuel costs related to delivering products to our commercial customers.

As we completed our hub store conversions during our fiscal fourth quarter last year, the pressure on operating expense from this initiative as a percentage of sales is expected to decline, as we anniversary these operational investments.

In addition to the specific elements of deleverage highlighted above, as our commercial business has become a more significant and more rapidly growing component of our overall sales, [in line] with the fact that [they] currently it operates at a higher rates of SG&A, it has and is likely to continue to provide pressure to our overall SG&A rates.

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

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 appropriately managing expenses in line with our overall performance.

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

EBIT for the quarter was $393 million, up 10.4% over last year's third quarter.

Our EBIT margin improved to 19.9% or 33 basis points versus the previous year's third quarter.

Interest expense for the quarter was $39.9 million compared with $36.8 million in Q3 a year ago, an 8.4% increase.

Debt outstanding at the end of the quarter was $3,221,000,000 or approximately $522 million more than last year's balance of $2,699,000,000.

Our adjusted debt level metric finished the quarter at 2.4 times EBITDAR.

While in any given quarter we may increase or decrease debt levels based on management's opinion regarding debt and equity conditions, we remain committed to both our investment grade rating and our capital allocation strategy.

Share repurchases are an important element of that strategy.

For the quarter, our tax rate was approximately 35.6%[,] down from last year's third quarter of 36.4%.

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

Net income for the quarter of $227 million was up 12.1% versus the prior year's third quarter.

Our diluted share count of 43 million was down approximately 13% from last year's third quarter.

The combination of these factors drove earnings per share for the quarter to $5.29, up 28.5% over the prior year's third quarter.

Related to the cash flow statement, for the third fiscal quarter of 2011, we've generated $456 million of operating cash flow.

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

We repurchased $339 million of AutoZone stock in the third quarter.

And at the end of the quarter, we had $152 million remaining under our share buyback authorization.

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

[Like] to date, we've bought $9.7 billion of our stock back.

Accounts payable as a percent of gross inventory finished the quarter at 109%, versus 98% in last year's third 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 $2.5 billion, up 8.9% versus Q3 inning balance last year.

Increased inventory reflects additional investments in our coverage for select categories.

While we continue to invest in inventory, we expect inventory growth in the future will be more modest.

Net fixed assets were up 8% versus last year.

Capital expenditures for the quarter totaled $92 million and reflected the additional expenditures required to open 56 new stores this quarter, capital expenditures on existing stores and work on development of new stores for upcoming quarters.

With the new stores open, we finished this past quarter with 4,467 stores in 48 states, the District of Columbia and Puerto Rico; and 261 stores in Mexico for a total store count of 4,728.

Depreciation totaled $44.9 million for the quarter versus last year's third quarter expense of $42.8 million.

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

Moody's Investors 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 Triple B as well and a commercial paper rating of [F2].

Finally, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 30.2%.

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

Now I'll turn it back to Bill Rhodes.

Thanks, Bill.

Before we conclude, I want to congratulate our entire organization for a very solid performance this past quarter, and reiterate that 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.

I also want to congratulate our organization for achieving $1 billion in commercial sales on a trailing four-quarter basis, a key milestone for us, and hopefully, just the first of many significant new records we set in this business.

Lastly, we're excited about the new quarter ahead and believe we're well-positioned to meet our customers' needs heading into the summer driving season.

While we currently have the challenge of higher gas prices before us, we believe our stores look great and the strategies we have in place will allow us to have a successful fourth quarter.

While our AutoZoners across the organization deserve credit for our past successes, we promise to remain committed to continuing to improve our business model and our operations, focusing on continual refinements but not radical change.

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

For the last quarter of fiscal 2011, we will continue to focus on our key priorities -- 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.

While we routinely measure our performance week-to-week, quarter-to-quarter, and year-to-year, we find it instructive to assess our performance over longer periods of time, and we like to compare our performance to other highly successful companies.

Recently, Fortune magazine released the Fortune 500.

This year, it highlights that from 2000 to 2010, our earnings per share grew 22.3% on an annualized basis, ranking us 31st for the 10-year period.

Even more impressive, our total return to investors over this 10-year period grew from 25.3%, ranking us 16th.

These are impressive results, and highlight the strength and consistency of our business model.

I believe these results are attributable to operating in a healthy industry, having a very disciplined business model and approach, and having a very strong culture of customer satisfaction that is operationalized by an incredibly committed and passionate team of over 60,000 AutoZoners.

Finally, 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 communities.

Our approach remains consistent.

We're focused on succeeding in the fourth quarter of 2011, and we are optimistic and excited about our future.

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

(Operator Instructions).

Gary Balter, Credit Suisse.

It's Gary and Simeon.

Congratulations on a great quarter.

I'd like to delve in on the things that didn't work well, but then I'd have no questions.

So I'll ask you something else.

Could you talk -- one of your competitors reported last week and they -- there's some indication that maybe some of the pricing is sticky.

It's very hard to see from your gross margin, which is so strong.

But can you talk about that, if you're seeing any inflationary pressures that are impacting the gross margin or potentially could be impacting the gross margin?

Clearly, Gary, as we said in our prepared remarks, in some areas where there's specific commodity increases, we are seeing some increased costs.

In many of those areas, we've passed those costs along to the consumer.

We will continue to do that.

That's been our history.

But we're also going to be mindful to make sure that we are priced right.

So we have taken leadership roles at times and moved pricing up.

As long as we stay competitive, we'll stay there.

On the commercial side, you've done superb.

Do you think now, like, basically, the investments are done?

Or -- because you mentioned like you've got all the hub stores set up and, obviously, you're driving fantastic numbers.

So from an expense point of view, is there a lot more spending to do?

Or is now maybe reaping the rewards, but are we going to see even stronger margins going forward?

You talked about how solid the margins are already.

Yes, I think that we're going to continue to invest in the business.

And we are starting to reap some of the benefits from it.

And again, we believe that this is a fairly immature business for us and we have a very small market share.

So we see opportunities for us to continue to add new programs; to continue to invest in field organization, so that we'll continue to invest.

But there's no question that we're gaining momentum in this industry and we're starting to reap some of the benefits now.

But we're continuing to invest and we're going to continue to take market share.

And actually, one more from Simeon.

Can you maybe separate out some of the better weather markets from some of the non-better weather -- into the poor weather markets, just what the comp spread may have been, the difference in that -- in the period, so we can get a sense of how different markets perform?

Yes, it's difficult always to peel out gas and peel out weather and all those things.

We believe that weather will even itself out over time.

As Bill indicated, when we look at it by category and by region, that clearly, some of the regions that were less affected.

And then we'd have to define what less meant -- those performed better.

So look -- we just look forward and we look at what we can do to continue to educate the consumer on how to save money, and continue to stick to our knitting.

Thanks.

Thank you very much.

John Lawrence, Morgan Keegan.

Congratulations.

Bill, would you comment just a little bit, staying on the commercial program for just a second, if you look at these -- the hub stores when they're relocated, what's the proper metric?

I mean, does it take a period of time to get the strong return as far as setting the inventory?

And then is the metric -- how productive those routes are?

Or fine-tuning that inventory per route so you see a maturity curve for a period of time in terms of return?

Sure.

Yes, I mean, as far as a maturity curve, we're still seeing our oldest hub stores continue to grow.

And that's encouraging to us.

On the ones -- as far as relocating them, we really haven't relocated many of them at this point in time, but we have expanded several of them.

And because maybe a store that only has 70 or 80% of the parts that we want in it, because it's just simply not large enough physically.

And so when we are able to expand it and put that product assortment in there, we actually reap the rewards very quickly, because the demand is already there in the marketplace.

So we've been very encouraged -- we can also very scientifically determine what we think the sales are going to be, because we see how those SKUs are performing in other hub stores.

And it's very easy to extrapolate that to the market where they don't exist.

Great.

Thanks.

And secondly, would you just peel it back a little bit on Duralast?

Tell us where we are and some of those categories, you still think you have some room?

We had very good penetration this quarter and the quarter before that as well, as we indicated.

We continue to believe that there's opportunity for us to expand the Duralast branded name in other categories.

And it's been very well received by our customer base, both DIY and the commercial customers.

So we feel terrific about how well that brand has grown and how well it's [been] accepted into the marketplace.

And there is continued opportunity for us to increase our penetration in other categories as well, John.

So that's an ongoing effort.

Thanks, guys.

Good luck.

Brian Nagel, Oppenheimer.

I actually would like to add my congratulations on another very nice quarter.

First question, on sales -- and I know you tell us, spoke -- like a lot of retailers lately, you spoke about the weather through the quarter.

Sounds like weather was, on balance, a slight or modest negative for you through the quarter.

The question I have is how should we think about now weather-related sales going forward?

Weather started to get better in most parts of the country.

Is there some type of pent-up demand or some sales lost?

And then conversely, with the very negative weather in some parts of the country actually can be a driver of sales, as we look forward into either next quarter over the next several months.

Yes, I think -- number one, the spring weather is always choppy.

I mean, spring is inherently choppy.

So the fact that we had weather challenges in certain markets is not to be unexpected.

Was it a little more or a little less this year?

I'm not sure that we can really get into that scientifically and ferret it out.

Because we do operate across the country.

As far as looking forward, the summertime weather patterns are generally more consistent.

Now we were going up against a very, very hot summer last year.

So as we go up against those really hot weeks, it will be interesting to see.

And those could present some modest challenges for us.

But overall, weather effects are not going to impact our business over the long-term.

We operate in such a large geography and, at the end of the day, we're going to control our destiny.

And we just need to make sure we keep doing the things that are resonating with the customers.

Okay.

Then the second question I have -- and I think I asked a similar question on last quarter's call -- but on the shrink -- you again called out shrink as an outsized driver of gross margins.

How should we think about the sustainability of that benefit into the coming quarters?

Yes, I mean, we're very pleased -- obviously, we had a benefit in Q2 and we have a benefit in Q3.

And it certainly feels that we have momentum going forward.

But shrink is one of those things and it's very difficult to predict too far out into the future.

We have very good momentum now.

And I think the loss prevention in the field organization has done an outstanding job undertaking several initiatives to really put a lot more science around reducing shrink.

They've done a very good job and we've had good benefits.

Is that sustainable?

We'd like to think so, but there's going to be no guarantee.

So we feel good about the results that we've got in both Q2 and Q3, and we believe that there will be continued improvement in Q4 a little bit.

Beyond that, it's very difficult to know for sure.

Okay.

Fair enough.

Thank you.

Aram Rubinson, Nomura.

A question I'm hoping you can help us figure out on Mexico a little bit.

You say in your 10-K that you've got two operating segments but only one reportable.

Can you give us some metrics in terms of what Mexico -- what the opportunity looks like, in terms of growth off the 260 or so stores you've got?

What the profit equation looks like?

Just trying to get a sense if there is an analog there for what Brazil could ultimately look like.

Yes.

Let me jump in there first.

Just be very, very careful on Brazil.

We were very hesitant to even mention it.

But as we were doing research down there, news that we're snooping around is getting out.

And we wanted to make sure you heard it from us here, first.

But it will be a long time -- use Mexico as an analog for Brazil.

We've been there 11 years and we have 261 stores out of 4,700 stores.

As far as an analog for the Mexico business, we haven't disclosed all the details of the Mexico business, but we have been very pleased with the profitability of that business segment over -- since we've been down there, certainly, over the last many years.

It operates very similar to the way we operate in the United States.

It's really remarkable how well our model has translated to Mexico.

As far as the ultimate store count, we really haven't determined that.

We certainly look at it and think we can continue to grow with this 50 stores per year basis for the foreseeable future.

I think we'll continue to learn down there as the middle class continues to emerge.

Hopefully, we'll have more opportunities, but we think we can grow for quite a period of times at this current store count growth rate.

So, basically, I mean, you're really growing your Mexican business at 23% store growth per annum.

You think something like that is sustainable?

Because that's quite a rapid rate of growth.

Yes, I don't know if it will be -- I don't know if we'll continue to grow at the percent.

I think we'll -- more than likely will be in this 50 store count range, plus or minus 5 stores as we go forward.

Obviously, when you're growing at -- we grew at 25% last year -- it puts a tremendous strain on the people engine.

And we've got to make sure that we've got the right people that understand our culture and our operating model.

So we're going to kind of cap it here for now.

If we see an opportunity to expand it, we would, but I really don't suspect that will happen.

Sounds like a good opportunity.

Thank you.

Greg Melich, ISI.

Bill, you mentioned average ticket and transactions.

I just wanted to get a little more -- if average ticket was better than the prior quarters, how much of that was mix?

Was there a little bit of inflation in there?

Or was it a shift to more commercial versus DIY?

And then similarly on the transactions, if they slowed a bit from the prior quarters, is that simply a fact that commercial is growing faster than DIY?

Help us out on that.

Yes, I'd focus more on DIY, solely; the commercial market is certainly quite a bit different on the transaction and ticket basis.

But in DIY, we clearly have seen some benefit to average ticket of inflation.

But I don't want you to think about it as regular, normal inflation.

This industry has two kinds of inflation.

It has the normal inflation, but it also has the inflation of comparable parts.

The starter for a 2010 model is much more expensive than a starter for a 2000 model, because it has enhanced technology.

Now it's going to last longer, and I've used the spark plug example for many, many times.

You used to be able to buy a copper-class spark plug for $0.99.

Today, you buy a platinum spark plug for $3.99.

It lasts three times as long.

That hurts transactions and that benefits average ticket.

So constantly, in these numbers, you always have that benefit going on.

On the transaction side, we did slow down, but we're still positive.

For many, many, many years, we ran negative in transaction count and really attributed it to that change in the quality of products that we sell -- we felt like that was driving that.

Great.

So that's -- so, basically, when you were describing that, that was all about DIY, that was --?

That's correct.

Okay.

And (multiple speakers) --

Obviously, our transaction count and commercial was up tremendously.

Right.

Got it.

And then on the -- on that deceleration, was it fair to say, given the inflation or mixes helping the average ticket, was the deceleration 100% traffic or transactions?

Well, I would say it was over 100%.

As I said, our ticket was actually better.

It was up more than it was last quarter.

Got it.

Great.

Thanks a lot.

Matthew Fassler, Goldman Sachs.

Two questions, and the first one relates to inventory.

You spoke earlier on the call about doing business, I guess, with a broader range of cars as the number of older cars on the road grows, I guess the variety increases as well.

And you also spoke to this probably being, if I heard you right, your quarter of biggest inventory increases.

So can you just talk about in a little more detail your decision to ramp the inventory up this quarter, and what you think you need to do to cater to perhaps the evolving demographics in the marketplace?

Yes, I think as far as this continuing process of having different category line review throughout the year, that we're finding more opportunities to add inventory and improve our coverage overall.

Obviously, we're heading into the busy season of the year, so this is the optimal time for us to be able to make sure that we're both in stock and that we've maximized our coverage the best we can.

So that's part of the reason that we would do it in this quarter.

But overall, as we continue to leverage the hub network, et cetera, we believe that there's opportunities for us to be able to add inventory and improve coverage.

So although the inventory level is a little bit higher than you might have expected, overall, we're pretty pleased with the complexion and the composition of the inventory that we have today.

And we think we're in a pretty healthy position.

And my second question relates to gross margin.

Last quarter, you had a pretty big gross margin pop.

And it was a pretty clean number.

When you look at this May quarter and you take out the shrink, you came back to the kind of trend that you've been accustomed to seeing.

As you contemplate the mix shift towards commercial and you contemplate what you're seeing with commodity prices, you have an understanding finally that you don't manage through gross margin rate, do you feel like you have the opportunity to continue to drive gross margin higher?

Or should we be more subdued in our thought process there?

We do believe that we have the opportunity to continue to drive gross margin.

And keep in mind that you're right -- commercial business operates at a slightly lower gross margins.

So as that mathematically becomes a larger piece of the puzzle, then it will put some pressure on gross margin.

But overall, the gross margin rates have been relatively healthy.

You're right, we've had some commodity price pressures, but we've been successful in passing those prices along and managing our way through it.

So overall, we feel pretty good about the merchandise team and what they've done.

And we believe margin is healthy and there's opportunity for us to continue to increase.

Got it.

Thank you so much.

Tony Cristello, BB&T Capital Markets.

First question I had was with respect to the initiatives.

You've had a lot and it seems like you've taken advantage of what's been a very robust operating environment for the aftermarket.

And I guess, what I'm wondering is, once we enter a more normalized environment -- and again, you might have a better idea for that one than I do -- but at some point, whether it's a year, or two, or three years down the road, how do we think about your need to grow, your need to spend versus what we think the initiatives put into place today will drive from a topline perspective?

Yes, it's a great question.

And obviously, we have been much more aggressive over the last 2.5 years on our initiatives.

Many of those initiatives we would have done -- we would have completed them, but we would have completed them over a longer period of time.

As we mentioned last year, we accelerated our hub stores and completed them over a year in advance of when we anticipated doing it because of the strength of the market.

Our hope is that from the development of these initiatives, that whether the market strengthens or slips a little bit, that we're going to come out of it in a stronger position than we came into it.

And I think we're doing just that.

And clearly, the market share information is showing us that.

Over time, if the market -- if the industry did slow, I am highly confident that our Company and our AutoZoners can effectively manage our cost structure.

All you have to do is go back and look at 2006, 2007, 2008, and I think we've proved at that point in time that we know how to manage costs.

And maybe on that, the market share gains that are quite apparent in your numbers, is it simply a function of the success you've had with the ongoing initiatives?

Or does it get back to just sort of the core fundamentals of how you approach an existing market?

Can you maybe just differentiate a little bit between the two and why you think you've had such great success?

Yes.

Obviously, you've got to split it into both businesses.

In commercial, we've had a step function change in the effectiveness of the way we go to market.

We created a new strategy about four years ago.

Our team has implemented it flawlessly.

We still have a long, long way to go with the commercial business, but we're very pleased with the progress we're making there.

On the DIY side, we've been in this business for almost 32 years now.

But we had a very well-refined business model that works incredibly well.

And what we're constantly doing is fine-tuning it; I'm very happy with our organization.

They have a testing mentality, so we don't go out and roll out big initiatives all at once.

We come up with big ideas or big initiatives or small initiatives.

And we go test them.

And once we prove that they're successful, we look at the other things that we want to do and we prioritize them, and we implement them over time.

That's very hopeful.

Thank you.

Chris Horvers, JPMorgan.

First a follow-up question on the investment side earlier.

As you think about the pace of expansion of hub and new commercial programs, once you anniversary the big hub investment in August, do you get any of that back?

Was there this upfront cost that you potentially get back?

Or is it just kind of goes into the base and then you manage around how the topline shapes up?

The latter.

I would say that it goes into the base.

We've changed the operating structure a little bit from how we manage the hubs.

And so we've increased the frequency of deliveries.

The next phase will be to expand some of the hubs.

That will be more one-time in nature.

But the operating structure that we have, we'll anniversary in August -- will it stay with us?

That's how we're going to operate it.

Now to your point, that as we continue to see how sales trend and perform, we will adjust our total cost structure to those sales -- not just hubs, but we'll adjust our total cost structure to match up for that.

But at the moment, we're getting great return on the hubs.

We've been very pleased with the results that we've had and we believe that that new operating structure is the right one.

And it sounds like -- I mean, if you're on pace for, like, I guess [130], I think, new programs year-to-date, based on your success, you would think that as you look into the next fiscal year, that you would keep that kind of pace up going forward?

We would keep up the pace relative to the operating structure that we have in place, is that what you mean?

Yes, I mean the number of new programs, new commercial programs.

Oh, we'll see.

We've had good luck with the commercial programs.

We've certainly accelerated the number of commercial programs that we had this year.

And then we'll continue to evaluate how many we'll open.

But obviously, as we've talked about before, we have a very small market share and it's only 57% of our overall stores.

So there's significant opportunity for us to expand our number of commercial programs.

And then you mentioned the maintenance category ticked down a bit year-over-year.

And you did point out saying, hey, there was some regional differences that varied by weather.

In the regions where you didn't see a weather impact, perhaps out West or other regions of the country, was maintenance more flat year-over-year?

And the tick-down was really driven off of the wet areas of the country?

We believe it was a little bit more weather-focused.

In some of the other regions, it was a little bit flatter.

So it gave us an indication it was a little bit more weather.

And then final question is, a lot of retailers have talked about the swing-down in April and the nice resumption in May in terms of comp trend.

Is that something that you saw in your business as well?

You know, we're two weeks and two days into a 16-week quarter, so we just really don't want to get into what our trends are doing currently.

Fair enough.

Thanks very much.

Colin McGranahan, Bernstein.

First question on the commercial business and the margin pressure.

Our understanding, obviously, that the gross margin rate is 400 or 500 basis points lower, but I would have thought -- and I know you have increased costs associated with the more frequent delivery in the hubs and salespeople and whatnot, but I would have thought that the contribution margin and the ability to leverage against fixed rent and depreciation and store overhead, would maybe result in a contribution margin closer to your EBIT margin.

It sounds like that's not the case.

Can you help us understand how much lower it is?

I don't necessarily want to go out and quantify it specifically, Colin.

But as we've said, over a long period of time, both the gross margin and the operating expenses or SG&A are worse than our DIY business.

And they're both fairly significantly worse -- today.

Now, a lot of that's because we've made tremendous investments from adding the sales force we didn't have three years ago, the technological advances, the significant labor components for those deliveries that we have to do, or are honored to do.

So there's a big SG&A difference as well.

Okay.

And just in terms of the magnitude of that, if it's 500 to 1,000 basis points lower, 13% of the business is growing at 15% faster, are we talking about an annual pressure of something in the 10 to 20 basis point range?

Well, I would just tell you, we've had the pressure over -- this business has really accelerated over the last 10 quarters or so.

And we've had that pressure over time.

And we've been able to manage it.

We've had other things that we specifically called out, such as hub stores and other things over time.

So that will give you some order of magnitude.

Okay.

That's helpful.

And then just finally on market share, I know you don't have a complete set of market data, given NPD is only a subset, but any sense of whether you're taking share within the NPD set?

Within the market not captured by NPD?

Or both?

We are definitely taking share year-over-year in DIY and commercial in the NPD set.

We can say that factually because we have the data.

We don't have the data for the piece that is not in the NPD share, but I think our suspicion is that the entire NPD group is probably growing its rate versus the people that are outside -- the more independents, in both retail and commercial.

Okay.

Great.

Thank you very much.

Scot Ciccarelli, RBC Capital Markets.

I understand you're not willing to talk about the first two weeks, but you did mention that you had a tremendous amount of sales variability week-to-week, geographic basis, et cetera.

Any chance we could get a better feel for the cadence during the quarter -- sales cadence?

Yes, I mean, we had a really fantastic first period of the quarter.

But we came out of a period before January where we were talking about how challenging it was and the weather broke.

This period of time is always highly volatile.

The last couple of periods were not as strong.

And there's a lot of reasons why.

And clearly, one of them was the weather was much choppier.

Okay.

That's helpful.

And then when you look at the -- you guys have gross margins increasing as well as your Accounts Payable to inventory ratio increasing.

Sometimes that actually turns out to be a trade-off depending on what you're doing with your vendors.

How much of the improvement of both of those metrics comes from the growing penetration of private label?

Is there any way to help size it for us?

I always look at it a couple of different ways.

One is there's maybe a little bit on the private label, but our inventory is more productive.

I mean, our inventory turn actually improved.

And that in and of itself is going to help AP to inventory ratio.

So part of it is really continued negotiations and working with our vendors, but a chunk of it is just the improvement in inventory turns.

So as we improve our inventory productivity, that's going to help the AP to inventory ratio as well.

Okay.

Thanks a lot.

Michael Lasser, UBS.

Thanks a lot for taking my question.

Bill, can you expand on your comments about the change in distribution of the age of parts sold -- it's widening at both ends?

Is that because of the inventory coverage?

Or is that because of the nature of the customer requests that you've been getting?

Yes, it's a fantastic question.

I think it depends.

It's yes and yes.

Our inventory coverage, particularly because we're in the commercial business now, gives us enough demand that we can add parts earlier in the vehicle lifecycle.

As we add those parts, it's been really remarkable to us -- certainly, we get the sales in the commercial business, but we also get them in the retail business -- always more than we would have thought.

Then on the other side of the vehicle lifecycle, people are just holding on to their cars longer, so the demand is higher than it was three or four years ago.

And you can see that in the average age of vehicle.

We see it in the average age of lookups that we get, which reference customer demand.

And can you tease out both those points, such that it happened concurrently with the really fantastic growth of the industry you've seen over the last couple of years?

Clearly, on the older side, that is absolutely correct.

On the newer side, I don't think it's a function of what's happened in the market; it's a function of the fact that we have inventory coverage that we didn't have in our satellite stores, and we have substantially more in our hub stores.

Okay.

And last question.

Are you seeing any wage pressure?

You know, you and your competitors are really going after the commercial segment aggressively.

And at some point, the competition for these workers is going to increase.

So, has that been an issue as of yet?

No.

We haven't seen any abnormal issues regarding wage pressures.

Okay.

Good luck.

Thanks so much.

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

We remain excited about our growth prospects for the balance of the year and beyond.

We cannot and won't take anything for granted, as we understand our customers have 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 very successful.

We'd also like to wish everyone a happy and safe upcoming Memorial Day.

It is a time for us to recognize the US soldiers who have died while in military service, and to thank those who are currently serving in our military.

As we operate our business as a marathon and not a sprint, we will continue to focus on the basics and never take our eye off of optimizing long-term shareholder value.

We remain confident AutoZone will continue to be incredibly successful.

And we thank you for participating in today's call.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may disconnect at this time.