汽車地帶 (AZO) 2012 Q2 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

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

Please be advised that 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.

This conference call will end promptly at 10 a.m.

Central Time, 11 a.m.

Eastern time.

Before Mr.

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

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

Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position to 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 we will [deem] to be appropriate.

These forward-looking things 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 change in laws or regulations.

Certain of these risks are discussed in more detail in the risk factors section contained in Item 1A under part 1 of our annual report on Form 10-K for the year ended August 27, 2011 and these risk factors should be read carefully.

Mr.

Rhodes, you may begin.

Good morning and thank you for joining us today for AutoZone's fiscal 2012 second-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 and Treasurer Investor Relations and Tax.

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

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

Please click on quarterly earnings conference calls to see them.

We are pleased to announce another quarter of strong financial and operational performance.

For the second fiscal quarter, our earnings per share increased 24.4% and our domestic same-store sales increased 5.9%.

This marks the 13th consecutive quarter of EPS growth in excess of 20% and the 22nd consecutive quarter of double-digit EPS growth.

Our sales and operating profit growth rates were in line with the last couple of quarters, driven by our continued growth in the retail sales category, strong performance in our commercial business, and impressive growth in our Mexico, ALLDATA, and e-commerce businesses.

Over the course of the last few years, we've grown total sales in the auto parts segment in the high single digit range while growing our other businesses in the low double-digit range.

The credit for our stability and performance belongs to all AutoZoners across the organization.

Their focus on improving customer service is what differentiates us in the eyes of our customers, which ultimately leads to our strong financial performance.

Our strategies have remained very consistent for many years.

While relatively simple and straightforward, they are focused on the areas that are very important to our customers.

The foundation for these strategies is consistently delivering trustworthy advice and intense focus on consistent execution and ongoing refinements to our processes and product offerings.

We remain committed to this approach and believe our AutoZoners' execution of this well-defined, well communicated plan has been a critical element in our success.

With our second-quarter sales up 8.6% over last year's quarter, customers continued to shop with us to find good values in order to effectively maintain, repair, and enhance their vehicles.

Our retail business performed well again this quarter despite strong same-store sales growth last year.

Our domestic commercial sales growth exceeded 20% for the seventh straight quarter and we grew our other business made up of ALLDATA and e-commerce by 11.3%.

In an effort to address questions that maybe on some listeners' minds this morning, I thought I would spend a moment discussing trend changes we have seen and their potential impact on current or future sales.

First as I am sure you are all aware, weather patterns during the second quarter, which as a reminder for us was from November 20 to February 11, were quite unusual, with lower levels of frozen precipitation and generally milder temperatures.

As we mentioned on our last earnings call, we are always very cautious about the second quarter when it comes to sales and profitability.

It is the seasonally lowest point for average weekly sales, which magnifies the profitability impact of sales changes and our sales performance can be quite volatile due to weather patterns, holiday calendar shifts, and pressures on consumer spending.

The calendar shift where Christmas and New Year's were on Saturday last year and Sunday this year were a small benefit to our performance.

The changes in our sales trends due to the weather are more difficult to summarize because they varied by category.

Clearly we suffered from lack of extreme weather in certain hard part categories where parts fail due to cold conditions and we also lost sales in some other categories that spike when severe weather is experienced.

However, we benefited from the milder weather in categories where the weather was more conducive to our customers working on their vehicles.

The net result is our failure-related categories grew slower than they have in recent quarters while our maintenance and discretionary categories expanded more rapidly than our recent past.

Overall the data available to us shows weather having a net positive effect on our same-store sales.

Also the shift in sales to more maintenance and discretionary categories had a positive impact on transaction count and a net negative impact on merchandise margins.

The merchandise we category as maintenance and discretionary carry lower tickets on average than failure merchandise, but represent a higher proportion of our transactions.

While transactions were still a headwind to the retail business this past quarter, they sequentially improved versus our first quarter.

While we experienced some improvement in transaction trends this quarter, our message on the DIY transaction front this morning remains consistent.

We expect over the long-term transactions to continue to remain under pressure as technological advancements result in longer-lasting, better performing parts and products typically with higher retails.

Concurrently we anticipate that the average price per piece will continue to experience gains.

Again, this is not a new phenomenon and is something we have managed through for well over a decade.

The bottom line is we remain optimistic about the trajectory of the retail industry and we have a high degree of confidence in our ability to continue to lead in this sector.

Secondly, we want to address new car sales and the potential impact an increasing seasonally adjusted annual rate of vehicle sales has on both our DIY and DIFM businesses.

It is not in our opinion a material driver to either sector like gas prices and miles driven.

And over the long term, we need new cars, as today's new cars are tomorrow's our kind of vehicles.

We do expect new car sales to increase from the depressed levels we have seen in recent years.

However, with over 240 million vehicles on the road and the average age at 10.6 years, the number of annual new car sales does not impact the overall vehicle mix materially.

And new car sales can't be considered in isolation.

Scrappage rates are also an important element and they have generally been in the 5% range or 12 million vehicles a year, basically offsetting the new vehicles added.

This impact has caused the number of total vehicles to remain at approximately 240 million vehicles for the last four years.

Our hope is absolute vehicles on the road going forward increases.

We want to reiterate, we believe that over the long term, miles driven and average age of vehicles are the most important metrics for our industry's future sales performance.

Now let me review our operating theme for 2012, 1TEAM Driving our Future.

The key priorities for the year are, one, great people providing great service; two, profitably growing our commercial business; three, leveraging the Internet; and four, hub store improvements.

On the retail front this past quarter under the great people providing great service theme, we continued with our theme of intense focus on improving execution.

We continue to invest in training our store AutoZoners.

We are also keenly focused on hiring and retaining the best parts professionals in the business and we have been pleased with our progress in this area.

Recently we implemented further enhancements to our parts catalog and sales tool, Z-net.

Additionally, we are in the final stages of developing a new labor management system to replace a two decades-old system.

This new system will further assist us in managing our business as one team, leveraging our resources across both DIY and DIFM while providing the best service to all customers, regardless of how they interact with us.

We are also working on new planogramming efforts to improve and customize our sales floor presentations to the demographics of the local market.

Lastly, our efforts around expanding the utilization of our hub stores remains a major focus.

Our ability to add coverage while growing inventory per store in a working capital friendly way is at the top of our priority list.

We continue to be very pleased with the results of this initiative and our efforts to ensure we have the right size hubs in the right locations is also progressing well.

On the commercial front, we are executing our plan to continually open new programs, opening 92 new programs during the second quarter.

We also focus diligently on growing our business with existing customers and we are quite pleased with our progress.

We now have Commercial in 2825 stores or 62% of our domestic store base.

We will discuss our operating performance in more detail later in the call; however, our results with our most recent new store openings combined with the success of our older programs has instilled greater confidence in our plans and encourages us to be aggressive in adding additional resources and new programs to this important growth initiative.

Regarding our second-quarter sales, our total auto parts segment made up of both our domestic and Mexico businesses delivered an 8.6% increase.

Our other businesses made up of ALLDATA and e-commerce, were up 11.3%.

During the quarter, we continued to open new stores both in the United States and Mexico, 29 new stores in the US and six in Mexico, and expect to grow square footage for the year at an annual combined growth rate of approximately 4%.

We also continued our hub store expansion and relocation efforts this past quarter.

With a total of 146 hubs, we expanded our hub count this past quarter by one.

We also expanded five locations, adding a material amount of square footage.

We did not relocate any hubs in the quarter.

Since we have begun our efforts on redefining our hub network and square footage needs, we have modified to some degree 34 hubs.

When we say modified, we mean either expand or relocate existing hubs.

As we continue to see traction from utilizing and expanding the reach of our hub network by expanding sales from new hub stores SKU additions plus related parts sales, we see the potential to modify in some way up to as many as 70 of the remaining hubs over the next few years.

Well, we spent a lot of time highlighting our hub strategy.

This strategy is very important currently but arguably even more important over the long term.

As parts proliferation continues to expand and vehicle parts technology advancement occur, in many cases it lowers lower unit sales per SKU.

In order to effectively combat this trend, it is imperative that we have the local market availability to service our customers on a just-in-time basis in a financially prudent manner.

Our hub strategy allows us to accomplish this objective by aggregating demand of a cluster of satellite stores.

In some cases combining this demand gives us the opportunity to add new local market coverage and in other cases it allows us to move products that are stocked in many of the satellite stores to the hub stores, improving the productivity of our inventory.

Local market inventory coverage is an imperative in this business for both our professional and retail customers and our hub strategy has allowed us to expand local market coverage in a cost-effective manner.

Additionally we continue to refine our product assortments in the satellite stores specifically focused on late-model coverage.

As our commercial performances improve, the overall sales productivity of our average store continues to increase, increasing approximately 4% over the prior year, allowing us the opportunity to efficiently expand our inventory assortments.

I will take a moment now to talk more specifically about our second-quarter performance in a little more detail.

As I mentioned, our domestic same-store sales grew 5.9% for the quarter.

Our second quarter, which ended February 11, did experience variability in sales results from week to week which we attribute primarily to the weather.

It is difficult to determine the net impact the weather had on our business for the quarter.

As mentioned previously on one hand, it clearly negatively impacted our cold-weather categories but on the other hand, the mild weather benefited some of our maintenance and discretionary categories.

Overall, we believe it was a net positive.

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

Our second-quarter commercial sales growth of 24.6% represents our seventh straight quarter of 20% sales growth.

While we are pleased with our commercial rate of growth, we recognize that we currently have a small market share and this remains a tremendous opportunity for us both in terms of growing the number of programs that we currently have as well as improving the productivity of our existing programs.

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

As we accelerate our investments to grow commercial and as commercial becomes a larger portion of our overall business, we anticipate our gross margin and operating expense rates will be challenged as commercial is currently a lower margin business.

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

It is important to highlight that while commercial is dilutive to our overall margins, the commercial business operating margin continues to improve despite heavy investments and the expectation is that over time it will continue to do so.

I would also like to recognize our other businesses, ALLDATA and e-commerce, for having another fine quarter of 11.3% in sales from this time last year.

This section of our business, while small as a percentage of our overall sales mix, continues to experience faster sales growth in the auto parts stores, and that's quite an accomplishment considering we remain pleased with our stores' performance.

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

Our efforts are concentrated on providing our retail customers with access to store product and repair information to help them research or complete the purchase online an important extension of the trustworthy advice we provide in our stores.

On the commercial side, we are providing our professional customers with tools to streamline their interactions with us, making us easier to do business with.

Also over the last several months, we begun to engage in social media, providing additional avenues for our customers to interact with us.

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 researching or ordering their parts and products.

We should also highlight another strong performance in return on invested capital as we were able to grow this metric to 32.2% on a trailing four-quarter basis, which represents another new all-time high for our organization.

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

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

The investments are mainly operating expense-related.

AutoZoners who develop relationships and sell to our customers and other AutoZoners who execute the orders and deliver products to these important customers.

The ability to leverage our existing assets, primarily AutoZoners, 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 is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we spend is our investors' capital.

Our financial performance has been impressive for the last few years, but I want to reiterate that we take nothing for granted.

Our commitment to our ongoing planning efforts allows us 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 while positioning our business for long-term growth and we will continue with this strategy well into the future.

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

Bill?

Thanks, Bill.

Good morning, everyone.

To start this morning, let me take a few moments to talk more specifically about our retail, commercial, and Mexico results.

For the quarter, total auto parts sales increased 8.6% on top of last year's second quarter's growth of 10.3%.

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

Regarding macro trends during the second quarter, unleaded gas prices started out at $3.37 a gallon and inched up, finishing the quarter at $3.52 a gallon.

Last year, gas prices increased $0.26 per gallon during the second quarter starting at $2.88 and ending at $3.14 a gallon.

We are always hoping for declining gas prices as a reduction in prices at the pump can materially help our customers' pocketbooks.

At the same time, with gas prices remaining high, we continue to communicate through our marketing messages to our customers the steps they can take to improve their gas mileage.

Miles driven remains a headwind to our sales potential for 2011 calendar year.

Only the months of January, February, and December showed upticks in driving.

Previous to December, the last nine months were negative versus the previous years' miles driven.

For the calendar year 2011, miles driven were down 1.2%.

That marked the first declining year since 2008.

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

We also recognize that the impact of miles driven on cars over 10 years old, the current average, is much different than on newer cars in terms of wear and tear.

For the trailing four quarters, total auto parts sales per square foot were at $263.

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

This metric is up 3.5% over last year's second quarter.

This is the highest level we have achieved since fiscal 2003.

This impressive improvement is a key contributor to our record EBIT margin percent and our record ROIC.

For the quarter, total commercial sales increased 24.6%.

For the second quarter, commercial represented 14.8% of our total sales and grew $53 million over last year's Q2.

Last year's commercial sales mix percent was 12.9%.

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.

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 92 new programs versus 74 programs last quarter and 43 programs during Q2 of last year.

We expanded the number of stores of the commercial program by 3.4% during this quarter and 12.1% over last year's second quarter ended.

We now have our commercial program in 2825 stores supported by 146 hub stores.

With only 62% of our domestic stores having a commercial program and our average revenue per program materially below several of our competitors, we believe there is ample opportunity for additional program growth aside from improved productivity opportunities in current programs.

Our focus this past quarter was to build upon the commercial initiatives that have been in place for the past -- for the last few years.

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

We are also enhancing training and introducing additional technology to optimize the productivity of our salesforce.

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

We've had 19 consecutive quarters of sales growth.

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

In addition to our focus on further developing and expanding our salesforce, 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, to additional labor hours and trucks.

In summary, we remain committed to building a platform for long-term growth at a deliberate pace, growth in both sales and profits.

Our commercial business remains on track and we are excited about our continuing opportunities.

Our Mexico stores continued to perform well.

We opened six new stores during the second quarter and eight stores since the beginning of fiscal 2012.

We currently have 287 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 have operated stores in Mexico for over 13 years and we continue to see great opportunity for growth going forward.

Our returns and profit growth have been in line with our expectations.

Our efforts to open new stores in Brazil is progressing and we expect to open our first store in the second half of calendar 2012.

We are also in the process of expanding ALLDATA to Europe.

Both of these initiatives are in the early stages and will be implanted in a measured fashion.

Neither should have a significant impact on our financial results over the midterm planning horizon.

Recapping our second-quarter performance for the Company in total, our sales for the quarter were $1.804 billion, an increase of 8.6% from last year's second quarter.

Domestic same-store sales or sales for stores open more than one year were up 5.9% for the quarter.

Gross margin for the quarter was 51.3% of sales, up 43 basis points compared to last year's second quarter.

The improvement in gross margin was primarily attributable to lower shrink expense.

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

While we have benefited the last five 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 most recent results.

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

Taken as a whole, inflation has not been a material component of our overall sales or gross margin improvements.

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

Looking forward, we continue to believe there remains 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 9.5% for the quarter.

SG&A for the quarter was 34.7% of sales, deleveraging by 13 basis points from last year's second quarter.

The primary contributor to the increase in operating expenses as a percentage of sales was higher self-insurance costs, partially offset by leverage of other operating expenses due to higher sales volumes.

This marks the second quarter where self-insurance was a headwind for us.

The exposure we are seeing in this area made up of medical, workers' compensation, auto and general liabilities has grown significantly higher.

We've implemented initiatives to manage this exposure more effectively on a go forward basis and with this additional focus expect this to be less of a pressure point going forward.

While our operating expense percentage growth increased faster than square footage growth, we have purposely invested these dollars in our strategic retail and commercial business initiatives 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 believe we are well positioned to manage our cost structure for the foreseeable future.

EBIT or earnings before interest and taxes for the quarter was $301 million, up 10.6% over last year's second quarter.

Our EBIT margin improved to 16.7% or 30 basis points versus the previous year's second quarter.

Interest expense for the quarter was $38.9 million compared with $39.6 million in Q2 a year ago, essentially flat.

Debt outstanding at the end of the quarter was $3.464 billion or approximately $215 million more than last year's second-quarter balance of $3.249 billion.

Our adjusted debt level metric finished the quarter at 2.43 EBITDAR while in any given quarter we may increase or decrease debt levels based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy.

And share repurchases are an important element of that strategy.

For the quarter, our tax rate was approximately 36.2% flat with last year's second quarter of 36.2%.

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

Net income for the quarter of $167 million was up 12.7% versus the prior year's second quarter.

Our diluted share count of 40.2 million shares was down approximately 9% from last year's second quarter.

The combination of these factors drove earnings per share for the quarter to $4.15, up 24.4% over the prior year's second quarter.

Relating to the cash flow statement for the second fiscal quarter of 2012, we generated $119 million of operating cash flow.

Net fixed assets were up 7% versus last year.

Capital expenditures for the quarter totaled $71 million and reflected the additional expenditures required to open 39 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 4,580 stores in 48 states, the District of Columbia, and Puerto Rico and 287 stores in Mexico, for a total store count of 4,867.

Depreciation totaled $47.5 million for the quarter versus last year's second quarter expense of $44.1 million.

With our excess cash flow, we repurchased $173 million of AutoZone stock in the second quarter and at the end of the quarter, we had $486 million remaining under our share buyback authorization.

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

Accounts payable as a percent of gross inventory finished the quarter at 110% versus 104% in last year's second quarter.

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

We reported an inventory balance of $2.6 billion, up 6.6% versus the Q2 ending balance last year.

Increased inventory reflects new store growth along with additional investments in coverage for select categories.

Inventory per store was up 2.3% and well below our 5.9% domestic same-store sales growth.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 32.2%.

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

Now I will turn it back to Bill Rhodes.

Thanks, Bill.

Before we conclude the call, I want to reiterate our team's commitment to our culture and our customers.

Although our industry's performance continues to be strong, we believe our efforts have contributed significantly to our success as evidenced by our sales and market share growth in both retail and commercial.

We remain committed to continuing to improve our business model and our operations, continual steady refinement.

We believe our business model is healthy and we have material opportunities for further improvements from this point.

For the remainder of fiscal 2012, we will continue to focus on our key priorities -- one, great people providing great service; two, profitably grow commercial; three, leverage the Internet; four, our hub strategy.

The financial results for the first half of fiscal 2012 have again been strong.

On the first-quarter earnings conference call, we cautioned listeners on the uncertainties of the second quarter, the winter weather, and the effects the Christmas selling season would have on our customers' wallets.

But with our AutoZoners' continued intense focus on providing great service and trustworthy advice, we were able to deliver these impressive results.

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 are focused on succeeding in the third quarter of 2012 and we are optimistic and excited about the remainder of the year.

Before we move to the question-and-answer period, I would like to take this opportunity to recognize and say goodbye to one of our great leaders.

Next month, Tim Briggs, Senior Vice President of Human Resources, will be retiring after 10 great years of service to AutoZone.

During his tenure, he has provided great stewardship over our human resources function and has been a key contributor to leading the overall organization.

He will certainly be missed, but he has built a strong team and his team will continue to provide great service to our organization in his absence.

We wish Tim and his family all the best in their future endeavors.

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

(Operator Instructions).

Aram Rubinson, Nomura Securities.

Actually Alisa Guyer on for Aram.

Can you talk just a little bit about sort of the 1TEAM approach as commercial gets bigger?

Are there any limitations to that approach?

Is it a reasonable expectation to run the store as a single operating entity even as that business gets bigger?

Yes, certainly there are times when -- as the commercial business in a particular location gains scale, the integration of the 1TEAM approach is generally less important.

It is typically when it's at lower volumes and you have fewer people.

Particularly on the commercial business, you need to leverage the DIY staffing to help manage through spikes in the business.

So over time as the average per-store sales increase, it is less and less important.

But remember, we have a wide variety of volumes on our commercial business per store.

Can you give us any sense of that range?

We can look at sort of the average per store, but my understanding is that there are very few commercial programs that are actually doing the average.

It's a pretty wide range and frankly we have really gotten into that in the past.

I don't necessarily know that it's pertinent right now.

What I can tell you is we have some stores that are doing really, really significant volume and we have some stores that do very little volume.

We are working to move them all up the spectrum.

Great, thanks so much.

Congratulations.

Kate McShane, Citi Investment Research.

Thanks, good morning.

You had mentioned in your prepared comments that the discretionary category was up this quarter.

I wondered if you could give us a little bit more detail on this.

Is this the first quarter where you've seen the discretionary category inflect positively?

And do you think it was all weather-related?

Yes, we've had some challenges, frankly for the last two or three years on our discretionary categories and this is the first time we've really seen some accelerated lift as compared to the rest of our business.

But really the one that really jumped out was the maintenance category and I think that that was due to weather.

I think the discretionary categories in some respect came along.

That's not to deemphasize the great work that our team is doing in the discretionary categories.

But I think as we get more footsteps in the stores, some of the discretionary purchases came along with those maintenance purchases.

Okay, great.

My second question is on the commercial business.

Have you talked about what your goal is for 2012 with regards to how many stores will have commercial business versus the 62% you reported today?

With regards to the 92 new programs in commercial, where did the majority of those accounts come from regionally?

I'll start with the first part of your question.

We really don't get into where we want to be at the end of the year.

I would tell you if we told you at the beginning of the year where we would be at the halfway point, we are significantly ahead of that.

We have a methodology here that is kind of termed two things.

One is pay-as-you-go and another one is under promise and over deliver.

So we set our sights low and as the business continues to perform, we try to accelerate it.

So at this point in time, we are very pleased with the progress that we've made so far this year.

Our performance continues to be good, so in the short term, we will continue to accelerate our openings but where we're going to end at the end of the year I think is somewhat dependent on how the business performs.

Secondly, your question was on regional variations of customers.

Help me with that a little bit.

Sure, you had highlighted the 92 new programs in commercial.

I wondered if there was one region where you had more success in obtaining those new programs or if it was more evenly distributed across the US?

It's very evenly distributed.

There are some areas, certain regions of the country where we aren't as penetrated as great and they will get a little bit of an upside, but that's really just been higher posture in those local markets on how aggressive we've been to open programs historically.

As we have continued to perform very well, everybody is getting a higher level of confidence in our ability and so we're being more aggressive in some of the markets where we were pretty conservative before.

But I think it's not based upon geography.

I think it's mainly based upon our posture in that local area.

Thank you very much.

Michael Lasser, UBS.

Good morning, thanks a lot for taking my question.

Do you think there's any risk that the warm weather in the last few months has pulled forward demand and you may feel it in the upcoming quarters especially at a time when oil prices and gas prices seem to be continually on the rise?

Yes, I think clearly that that has been one of our concerns as the warm weather hit in December and we saw some of our maintenance-related categories performing very well.

I will tell you we were quite concerned that it was a significant pull forward.

I will tell you that as we have gotten further into the season where we typically see the seasonal ramp up, that has become less of a concern than it was several months ago.

The second part of your question regarding gas prices, clearly we have mentioned it many times in the past as we see significant increases in gas prices.

That creates a headwind for our business.

So we are clearly mindful of where gas prices are and where they are headed and we are managing or projecting our business accordingly, but who knows where they're going to go?

What I know is we will focus very much on how do we help our customers manage through a high gas price environment?

How do we market to them?

How do we help sell them the parts and products that will increase their fuel efficiency?

This isn't the first time we have been through it.

We've managed through it very well in the past but it clearly would be a significant headwind.

And then my follow-up question is if you isolate the labor expense this quarter and the trend over the last couple of quarters, how is the leverage flowing through on labor expense as a lot of the growth has come from commercial?

You know, it's a good question.

We have been successful at leveraging labor.

At the same time for the new programs that we are opening in commercial, obviously there is an investment that takes place on that and we certainly have opened more stores in the front half of this year than we have in the front half of last year.

We feel, as Bill mentioned, good about the progress that we are making in commercial, so we expect to continue to make those investments but on our baseline business, we continue to (technical difficulty) leverage from a labor perspective.

Okay, so labor leverage hasn't really been there as you focused a lot of the investments on the commercial side?

Some labor leverage on our core base business and what I was mentioning was that on some of the newer programs you will see a little bit higher labor.

So as we continue to ramp those up, there will be a little bit of deleverage just in those programs.

Okay, that's really helpful.

Thanks a lot and good luck.

Alan Rifkin, Barclays Capital.

This is actually [Helen Caselli] in for Allen.

Congratulations on the quarter and thanks for taking our question.

We were wondering if you could sort of talk about how the comp progressed throughout the quarter.

Was the quarter very back-end loaded in terms of performance?

I wouldn't say it was back-end loaded.

Actually if you looked at the trajectory of the business during the quarter, the middle part was really where the strength of the quarter came.

And -- but if you take a step back and look at it more holistically, if you look at it on a two-year basis it was really very consistent.

So I think it is more to do with year-over-year comparisons during the quarter than anything timing wise otherwise.

And then I just have another question on the commercial.

You said that the range of performance was very wide.

Have you seen that sort of narrow as existing companies or existing programs mature at all?

Clearly as they mature, yes, we see them narrow and frankly we see them increase.

We've seen nice growth in our average weekly sales on the commercial program.

But we continue to open new programs so those newer programs put pressure on the average weekly sales, albeit we are very pleased with their progress.

They are coming out at higher levels than they used to and they are maturing faster.

So we continue to be pleased with the progress, but with only 62% of our stores in the commercial program, we will continue to open programs for an extended period of time.

That will pressure our average weekly sales, and as Bill mentioned, it will also pressure our operating margins because as you open those stores they are an EBIT drag for a period of time.

Okay, thank you.

Greg Melich, ISI.

Just a follow-up on the SG&A question.

The growing 9%, the dollars this quarter, would you say that's a good sort of normal run rate now given what you plan for commercial and these activities in Brazil and the ALLDATA, building that business for Europe?

I think it's probably hopefully a little bit at the high end on that, so I think that we have opportunities just to continue to manage it.

The key is for us to be able to try to control the expenses that don't really do a lot from a customer service perspective, so things like risk management, etc., we've got to be able to do a better job of lowering those expenses.

Conversely we've done a great job from a shrink perspective in being able to add margin improvement on that.

Further on to SG&A, as you mentioned, we continue to feel good about the commercial programs.

We've opened close to 200 of those programs in the first half of this year.

That's on pace.

We opened just over 200 programs for the full year last year.

So we will continue to make investments in commercial particularly given the results that we have seen.

And as you mentioned to a very lesser extent, things like ALLDATA Europe, Brazil, etc., those are investments that albeit that we will continue to be internally aggressive about, they will not be material to the financial statements overall.

So our investments are mostly focused on hub stores and commercial.

Those are the places you will see us.

And the labor scheduling, that new program that you said you are implementing, it was a 20-year-old system I think I heard in the prepared comments.

Can you describe a little bit of the timing of that and the cost and when we should expect to see that?

We expect to have that probably rolled out to the chain by the end of our fiscal year, so hopefully at the beginning of our fiscal year '13, we will have that system in place.

And really it is an opportunity for us to get better visibility and better micro managing, if you will, from a labor perspective.

So as Bill mentioned, it is a 20-year-old system and it has worked well up to this point, but we really have an opportunity to take it to a next generation and really manage it at a lower level than we have before.

So we think we'll be able to improve some efficiencies along the way.

Much of the investment has been made up to this point and so we're in the final stages of the investment.

Great and just lastly on comp transactions, I think, Bill, you mentioned that DIY you think it is sort of structural that you might get more AUR but it's just hard to get more actual transactions.

In this quarter, was it actually negative still or did it actually get slightly positive?

It was a headwind this quarter, and Greg, I've tried to be very clear on this point.

It has been that way as long as I have been in this business.

We have seen significant -- or minor degradation in transaction counts year over year over year except during recessionary cycles as long as I have been in this business.

But you also have to understand that that is structural in a lot of cases because new parts technology make parts and products perform better and last longer, but at the same time all the technology that goes into make them perform better costs more.

So there's a natural headwind on average ticket -- excuse me, a natural benefit on average ticket and a natural headwind on same-store transaction counts.

Thanks for that.

Good job, guys.

David Gober, Morgan Stanley.

Thanks for taking the question.

Just wanted to dig into the commercial margins a little bit more and, Bill, I think you mentioned that commercial margins have been going up and I wondered if that was simply related to the number of older programs continuing to grow and those programs maturing or if there has actually been any sort of structural shift in the way that you are executing the commercial business that has improved your ability to execute sooner?

I think I would look at it as the maturation of some of the older programs, so think about the fact that we have got a lot of programs that are still relatively immature and so we are EBIT margin improvement in just our commercial business alone as the investments that we have to open those programs begin to get leveraged as those programs begin to gain maturity and gain sales volume.

So it really is a leverageable model and we believe there's opportunities to continue to improve our EBIT margin within our commercial business.

As we've stated before, commercial operates at a lower margin than DIY, so as commercial becomes a larger piece of the puzzle it will put some pressure on operating margin percent although obviously we're focused on operating margin dollars, which is a real driver for ROIC as well because the investments aren't that significant to get a commercial program going.

But overall, operating margin is going to continue to improve we believe on the commercial programs as they continue to gain momentum and increase in volumes.

Bill, I guess just a follow-up on return of capital.

This quarter share buybacks were down a little bit versus last year and obviously that's going to happen eventually.

But I was just curious if there's any change in the thinking around longer-term capital allocation or if there's any incremental thought being given to dividends over buybacks or any change in the capital allocation philosophy?

No, we actually feel pretty good about the capital allocation philosophy.

We believe that maintaining BBB stable, targeting credit metric of 2.5 albeit there will be some fluctuation in any given quarter, we think that that is the right capital deployment and it's served us very well and we think it has showed up in our financial results.

Great, thank you very much.

Chris Horvers, JPMorgan.

Thanks and good morning.

You mentioned even after the easy weather comparisons in January you thought that the performance and the seasonal ramp has been encouraging even after that.

As you look into that and the come along on the discretionary side in 4Q, do you think this is a sign of the consumer feeling a little bit better overall?

We are hearing from a lot of retailers that they have been positively surprised by sales, so I was curious if that is something that you have looked at or perhaps discussed internally?

Yes, Chris, you've got to remember first that when things got really bad, our business did not get bad.

So I don't think that we are a good barometer of how the consumer feels good or bad.

I don't think we have seen anything material in our trends that would make us think that the consumer's mindset has changed one way or the other, but it could be happening very much in other sectors of retail and we are just somewhat immune to those.

Got you.

And as you pushed out the commercial program, has there been any competitive changes as you have ramped up the growth and entered new markets?

I would say we haven't seen any material competitive changes across all geographies.

In certain geographies you will see somebody do something different but generally it has been consistent.

Unfortunately we have a lot of great competitors out there and they're tough everyday out on the street, but our commercial team is really continuing to execute at a very high level and that is showing up in our growth and share and sales.

Thanks very much.

Michael Baker, Deutsche Bank.

Thanks, just one real quick commercial-related question.

Can you maybe articulate why you think your average commercial sales volumes versus others is so much lower?

Is there anything structural there, the way you go about it with your salesforce?

Just trying to figure out what the potential opportunity would be there.

Thanks.

Yes, I think it is maturation of our commercial business.

We kind of changed our commercial strategy about 4 1/2 years ago and we've been very methodical with it, but we are a bit behind the development of other players in our sector, behind some of them by 50, 60, 70 years.

But -- and others more on a comparable basis.

But we don't see anything in the commercial business that makes us think long-term that we should perform any worse than the rest of the marketplace.

Okay and I guess related to that, the outside salesforce that you guys employ d there, I have a number from about a year ago that it was about 250 outside salespeople.

Can you update us on where you are in that process?

Yes, we continue -- we kind of quit giving the specific numbers for competitive reasons, but it continues to grow year-over-year and it has grown quite substantially since then.

We continue to be very pleased not only with the number of salespeople out there but really the maturation of that salesforce.

We have done a lot of training for that salesforce.

We provided them with some technology that makes them more effective and frankly over time, they continue to gain more confidence in our program and they have been a key contributor to our success.

So one last question.

I am just curious how are you guys and those sales guys, how are they going to try to win business from an existing player?

Is it the other guys have the SKU count that you guys have matured, so is it on price, is it service?

How do you see you guys differentiating from the other guys to try to get to their volumes?

I think if you look at our history, the strength of AutoZone's business has been our culture, which folds into great customer service and also our ability to have the right parts and the right products.

We've got good, strong brands.

We leverage technology to make us a more efficient player and I think those are the kinds of things, just same things that made us special in retail relate themselves very well to the commercial business.

Okay, thank you.

Colin McGranahan, Bernstein.

Good morning, just a quick one on the self-insurance reserve.

I think this was the second quarter in a row that you might have mentioned it.

It looks like the broader market trend is maybe for some of those medical cost pressures to actually have eased a bit.

So wondering what specifically is driving that impact, a relatively large impact, and how long you think that persists?

That is a good question and in fairness, we didn't mention it last quarter as well and it was a bit of a headwind and so for us it is just claim-related, larger claim costs from a medical perspective.

At the same time we also with increased activity on the commercial side of the business and significantly more trucks, etc., we've had some higher experience there as well from auto liability and workers' comp.

So it really is activity-based for us as well as some large claim experience.

So we think we will cycle through that and we've got some initiatives in place and so as we look forward we expect it to be less of a headwind.

Okay, that's fair.

And I got on the call late so I may have missed it but did you detail what you thought the gross margin pressure was from commercial mix?

We did not necessarily other than the things that we've said in the previous week but again, obviously we got some benefit from shrink.

Commercial continues to be a bit of a headwind on certainly our gross margin rate but obviously we have overcome that with other things.

So I would categorize it as overall our gross margin rate remains relatively healthy.

Certainly from a mix perspective, commercial will wind up putting some pressure on gross margin.

As commercial matures over time, we believe that our EBIT margin will improve.

But the commercial will operate at lower margin than DIY.

I guess the other thing on gross margin, we did have some fairly significant pressure in the quarter based upon the mix of products (technical difficulty) sold.

And that was generally driven by the weather-related categories.

Great, thank you very much.

Bret Jordan, Avondale Partners.

Good morning, just a quick follow-up on the discretionary mix trying to determine the weather impact versus the economic impact.

Did you look at that improvement in markets that did not have abnormal weather patterns over the winter?

Did discretionary remain more or less flat in some of your Southern or Western markets?

Frankly we saw the weather pattern changes pretty significant across every part of the United States.

The South had significantly warmer weather.

The West was warmer, so no, we haven't tried to go tease it out of those individual markets but we saw it pretty much across the board.

But it really feels like it is a weather impact versus an improvement in consumer confidence, buying categories they didn't buy two years ago?

I think that's our supposition at this point in time.

We will learn more as we go forward but we saw a big change in the growth rates of maintenance-related products, which are really the kinds of things that our customers would do in more favorable weather patterns.

So our supposition at this point in time was that discretionary kind of came along with that much more so than there has been a change in consumer mindset.

Okay, great.

Thank you.

Thank you.

I would now like to turn the call back over to your speakers for any closing comments.

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

We remain excited about our growth prospects for the year.

We cannot 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 have a solid plan for the remainder of 2012 and our team is positioned to succeed, but I want to stress that this is a marathon and not a sprint as we will 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.

We want to thank you for participating in today's call.

Have a great day.

Thank you.

This does conclude today's conference.

Thank you for participating.

You may disconnect at this time.