汽車地帶 (AZO) 2013 Q1 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

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

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

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

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

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

The conference call will end promptly at 10 AM central time, 11 AM Eastern time.

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

Certain statements contained in this presentation are forward-looking statements.

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

These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate.

These forward-looking statements are subject to a number of risks and uncertainties, including without limitation, credit market conditions, the impact of recessionary conditions, competition, product demand, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, energy prices, war and the prospect of war, including terrorist activity, availability of consumer transportation, construction delays, access to available and feasible financing and changes in laws or regulations.

Certain of these risks are discussed in more detail in the risk factors section contained in item 1-A under Part 1 of our Annual Report on Form 10-K for the year ended August 25, 2012 and these risk factors should be read carefully.

Mr. Rhodes, you may now begin.

Good morning.

And thank you for joining us today for AutoZone's fiscal 2013 first quarter conference call.

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

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

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

Please click on quarterly earnings conference calls to see them.

To begin this morning, I want to thank all AutoZoners across the globe for another very solid quarter.

Although we faced a difficult sales environment, particularly in the Northeast, Midwest and Plains states, our team did a great job of managing expenses while executing great customer service.

We are committed to steady earnings performance and efficient capital deployment and we delivered on our commitments this quarter.

On this morning's conference call, Bill Giles and I will provide color on our initiatives in our Domestic DIY, Commercial, Mexico, and ALLDATA businesses, as well as our efforts in Brazil.

To begin, I'd like to highlight the key events during the quarter.

Just after our last conference call, we held our national sales meeting here in Memphis.

At this event we hosted our senior field leadership along with the recognized best and brightest store managers, those we call our President's Club members.

We reiterated our objectives to improve customer service store by store and grow our commercial business.

But we also recognized the selling environment could be challenging for a period of time.

We understood the macro factors affecting our business would not be solved overnight.

We stressed managing expenses carefully, but not at the detriment of customer service.

To this end, our team did an outstanding job with execution.

I am very pleased to report we were able to again deliver share gains in both our retail and commercial sectors.

This data now is only available at a high level national basis, but it helps us monitor our progress and we continue to be pleased with the results.

Just a few weeks ago, several members of our team flew to Sao Paulo, Brazil, for the official grand opening of our first store in Brazil.

Everyone was very excited as our store AutoZoners epitomized what it means to deliver WOW customer service.

I must say, it was so incredibly exciting to see that familiar AutoZone brand standing tall in Sorocaba, Brazil.

Finally, we held our annual sales and leadership council where we recognized the best of the best at AutoZone.

The council consisted of the top 136 sales and operation leaders from across the United States.

This team of incredibly talented and committed leaders is amazing to me.

Their enthusiasm for their customers, AutoZoners and the performance of this amazing Company is infectious.

These are the current and future leaders of this organization and I left that event feeling even more enthusiastic about our future.

Regarding this past quarter's results, Q1 marked our 25th consecutive quarter of double-digit earnings per share growth.

We're very pleased with our ability to consistently deliver strong EPS growth through our financial model of steady mid single digit EBIT dollar growth or better, along with high single digit reductions in diluted share count.

Our goal quarter over quarter continues to be to provide consistency to our shareholders, our AutoZoners and our customers.

We feel this targeted consistency in both financial performance as well as execution of our key initiatives results in stability and confidence for our stockholders and AutoZoners.

Next I'd like to highlight our sales results for the past quarter.

Our sales were up 3.5%, and our same store sales were up 0.2%.

This quarter same store sales results compared to last year's first quarter comps of 4.6%.

Our same store sales results are a combination of both our retail and commercial businesses.

I should point out, our total commercial sales were up 12% over last year's first quarter, driven by a combination of existing programs and the addition of 357 net new programs over the trailing 12 months.

Our overall sales performance for the quarter was softer than we had hoped but we were not entirely -- but they were not entirely unexpected.

Our results were inconsistent from month to month.

However, we did finish the quarter stronger than it began, in spite of Hurricane Sandy impacting a large portion of the Northeast.

The substantial differences in sales by regions, like our fourth quarter, continued for us during this first quarter.

The three regions of the Northeast, Midwest and Plains states continued to track materially below the remainder of the country for the quarter.

In fact, 5 percentage points difference in same store sales between the remaining seven regions and the three affected regions.

This slowdown continued to surprise us as this area of the country has been where a fair percentage of our new stores and new commercial programs have been opened in the last couple of years.

Certainly, this wasn't the only story affecting sales but it continues to be a challenge for us.

What I can say is we began to see some improvements in these areas after Sandy, and may be directly related to Sandy's effects starting in November.

It is nice to be able to say these markets DIY sales turned positive the last two weeks of the quarter.

We continue to feel our initiatives are having a positive impact.

The challenges we experienced in the Northeast, Plains and Great Lakes appear more macro in nature and less about specific actions we or any of our competitors have taken.

We understand we're competing every day with very good, well-established competitors.

But we remain confident in our current business model and the initiatives we have undertaken to continually provide improving customer service.

We continue to feel our selling proposition is a real differentiator to our customers.

And when customer traffic improves, we will be well positioned to further capture market share gains.

Additionally, based on national industry sales data that is available, results show we continue to outpace our total competitive base in both the DIY and commercial sectors.

With this said, I want to mention again some other points we're asked regularly about auto part sales.

We're asked if the lack of new car sales the last few years or the ramp in new car sales this year puts pressure on your business.

Clearly, new car sales for 2009, '10 and '11 were lower than the preceding years.

This may prove to be a headwind as those vehicles age, as there are less of them.

However, data shows this can be offset by the average age of vehicles -- as average age of vehicles continues to increase and the population of cars older than 11 years becomes a majority of the vehicles on the road.

Therefore, we do not see this metric as a key factor in our current sales performance.

Also, we appreciate what the more recent new car sales can mean to the impact on our business.

We're asked if people are foregoing repairs in anticipation of buying a new car.

What really matters to us is what's happening with those old cars at the time new cars are purchased.

As long as those cars are resold, we're not losing any business.

From very preliminary data on 2012, our position is the absolute car registrations will increase in 2012.

Speaking in regard to our DIY business, as we've discussed in the past, the bigger issue is the types of products we're selling and where our opportunities lie.

We break product categories into failure, maintenance and discretionary purchases.

As we've also said previously, maintenance products have not had the sales growth the other sectors have had in recent quarters.

Maintenance routinely represents about 40% of any quarter's sales, and this category for us has been growing over the last year in a low single digit range, versus the failure and discretionary categories growing in the mid single digit range.

The products we sell categorized as maintenance are typically those an owner's manuals say should be changed at some select mileage intervals.

This past quarter, these three regions had much weaker than expected sales, specifically in this category.

And even more specifically, the handful of merchandise categories challenged in the fourth quarter remain challenged this quarter.

Excluding these categories, our results in these areas and in total would have been consistent with the other regions.

Now, it is important to note there are always better and worse performing regions across the country.

Because we've not been able to come up with a better explanation to this divergence than unseasonable weather patterns over the calendar year, we continue to believe the only way we'll know for sure what is driving the difference is time, time to compare these regions' results against the upcoming winter and spring.

At this point, we don't believe any sales correlations to miles driven, new car sales or gas prices in these parts of the country exist to explain the sales fall-off.

This morning we want to call out some key accomplishments for the quarter.

We completed seven additional hub projects this past quarter, taking our hub resets life to date to 67.

We continue to be quite pleased with the sales benefits from the reset hubs, as we have increased the size and/or improved the location allowing us to expand the number of SKUs offered on a same day basis in the market.

These SKUs have benefited both retail and commercial customers.

Due to our hub strategy, and more specifically what the additional hub space offers, we were able to place additional hard parts inventory in the local markets, allowing us to better meet the ever increasing needs of our customers.

I know many of you have read how inventory per store has increased within our industry over the last few years and not in a small way.

This is due to the proliferation of unique makes and models constantly being rolled out each year.

Our listeners should expect us to talk about proper inventory placement for years to come.

We believe our hub strategy better positions us to address this need.

Regarding Mexico, we opened 4 stores this quarter and finished with 325 stores.

Sales in our other businesses achieved very solid sales results.

Our ALLDATA and e-commerce businesses continued to perform well, increasing 5.3% over last year.

There are great opportunities for e-commerce sales growth on both a business to business basis and to individual customers or B to C. While both businesses are relatively small for us, we are experimenting to understand where the most potential exists.

At this point, we still view DIY e-commerce as supplemental to our walk-in business.

What we do want to have is the best website possible for our customers to research their vehicle needs.

We continue to spend our resources on this design element.

Also, in our press release this morning we announced the definitive agreement to acquire the assets and select liabilities of AutoAnything.

AutoAnything is a leading online retailer of specialty automotive products.

Sales are expected to be approximately $125 million for calendar 2012.

AutoAnything was initially founded by Selwyn Klein in 1979, incidentally, the same year AutoZone was founded, as a manufacturer and retail of sheep skin seat covers and custom carpet floor mats.

In the late 1990s, Selwyn was joined by both of his sons, David and Trevor, and together they set out to expand their Company into an online retailer of automotive products.

Along with the addition of many other talented and dedicated leaders and employees, they have built a sizable and profitable business.

When we first met with the Kleins and a few other members of their team, it was quickly evident that our business philosophies and values were closely aligned.

At AutoZone, the first line of our pledge is AutoZoners always put customers first.

At AutoAnything, their core belief is to always do what is in the best interest of the customer.

We are very excited about this announcement and excited to finalize the transaction by the end of this calendar year.

We believe together these two organizations can leverage each other's strengths and capabilities and improve the performance of both businesses.

Our plans are to continue to operate AutoAnything as a standalone entity located in San Diego, California.

We very much look forward to finalizing this transaction and formally welcoming the talented members of the AutoZone -- AutoAnything team to AutoZone.

As this transaction is not yet closed, we are not announcing the purchase price but once it is closed it will be disclosed in our financial statements.

Lastly, the acquisition is expected to be slightly dilutive to fiscal 2013 EPS and accretive in 2014 and beyond.

We continue to remain bullish on our industry sales growth opportunities on both the retail and commercial fronts over the long term.

As the vehicle population continues to age and consumers continue to look for good values while maintaining their vehicles, we see AutoZone's opportunity to sell these customers only growing.

Now, let me review our highlights regarding execution of our operating theme for 2013, 1TEAM Delivering Wow.

The key priorities for the year are Great People Providing Great Service.

Profitably growing our commercial business, leveraging the Internet, hub store improvements, and leveraged technology to improve the customer experience while optimizing efficiencies.

On the retail front this past quarter under the Great People Providing Great Service theme, we continued with our intense focus on improving execution.

We continued to invest in training our store AutoZoners.

We completed the roll-out of our new labor management system and replaced our legacy system.

In regards to commercial, we opened 37 programs during the quarter.

We elected to moderate our commercial program openings during Q1, and instead pushed our planned openings closer to spring when a more normal ramp in sales is expected.

We did not feel we were missing anything by delaying some openings for a short period of time.

We continued to see commercial as a material sales growth driver for us for many years to come.

Our results continued to provide us confidence to be aggressive in adding additional resources and new programs to this important growth initiative.

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

Our domestic same store sales grew 0.2% for the quarter.

Our first quarter, which ended November 17, did experience some variability in month-to-month sales results.

More importantly, the impact on our regional basis continued to be our story.

The separation of results began in April for us and continued through this quarter.

As we've said previously, the category of sales we defined as maintenance had the most challenging comparison on the quarter.

With approximately 40% of our sales in this classification, sales of this category were soft, particularly in the subset of geographic regions previously discussed.

As weather and the mild winter experienced in these regions appear to be a contributor, as we've said previously, weather always evens out over the long term.

So we never get too excited on the upside or the down side.

We do not believe that the softness was due to any actions we or our competitors took.

This regional difference in results carried through to our commercial business as well.

Our small market share and current growth trajectory from our newer programs gives us confidence in our future buildout potential.

We will continue to invest to grow our commercial business and penetrate a larger percentage of our existing store base.

As I said earlier, ALLDATA and e-commerce had another fine quarter, up 5.3% in sales from this time last year.

This portion of our business while small as a percentage of our overall sales mix continues to experience faster sales growth than the auto parts stores.

Regarding our ALLDATA product in Europe, we remain very upbeat on the sales potential in this area of the world.

There are competitors to ALLDATA there today but we feel there's a real point of differentiation with our product.

The sales ramp for this business is planned to be gradual over 2013, but our hope is to have a material increase in sales within a two to three year time period.

We should also highlight another strong performance in return on invested capital as we were able to finish the quarter at 33%.

This statistic has shown steady improvement, reflecting our efforts to efficiently use the capital we deploy.

It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital is our investors' capital.

Before I pass the discuss over to Bill Giles to talk about our financial results I'd like to state how proud we are of our entire organization's efforts to plan and manage this business appropriately.

When we entered this quarter, we anticipated that the sales environment would potentially not be robust.

We communicated this possibility to the organization and explained that in more challenging environments, we have to be even more aggressive on cost controls.

It had been a few years since we had to use this muscle, but in typical AutoZone fashion our team responded quickly and appropriately.

I'm very proud of our team for their commitment to great service and for their commitment to success.

As we look forward, we will continue to aggressively manage our cost structure while simultaneously execute our initiatives and drive productive sales growth.

Now, here's 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 international results for the quarter.

For the quarter, total auto parts sales increased 3.4% on top of last year's first quarter's growth of 7.4%.

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

Regarding macro trends, during the first quarter nationally unleaded gas prices started out at $3.78 a gallon and ended the quarter at $3.43 a gallon, a $0.35 decline.

Last year, gas prices decreased similarly, by $0.26 per gallon during the first quarter, starting at $3.63, and ending at $3.37 a gallon.

We continue to believe gas prices have a real impact on our customer's abilities to maintain their vehicles and we believe the recent declines in prices provide our customers with a much deserved increase in their disposable incomes.

During the quarter prices declined on a national basis steadily, consistent with the prior year trends.

While there were some regional disruptions in California and with Hurricane Sandy in the Northeast, gas did come down a bit.

At the same time, with gas prices remaining at these overall higher levels, we continued to communicate through our marketing messages to our customers the steps they can take to improve their gas mileage.

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.

Miles driven were down 0.3% in July, up 1.2% in August, and down again 1.5% in September.

At this point, we do not have data for October and November.

Year-to-date through September, miles driven are up slightly, 0.6%, from last year.

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.

For the trailing four quarters, total auto part sales per average square foot were $264.

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

This metric is up 1.1% over last year's first quarter.

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

For the quarter, total commercial sales increased 12.2%.

For the first quarter commercial represented 15.4% of our total sales, and grew $33 million over last year's Q1.

Last year's commercial sales mix percent was 14.2%.

As we have said previously, overall we have been very pleased with the progress we are making in our commercial business, both operationally and financially, and we remain on track with our plans.

We believe there are ample opportunities for us to continue to improve many facets of our operations and offerings and, therefore, we are 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 37 new programs versus 100 plus programs opened in each of our third and fourth quarters of last fiscal year.

We now have our commercial program in 3,090 stores, supported by 149 hubs.

However, it is worth highlighting that approximately 25% of our programs are three years old or younger.

With only 66% 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.

In regard to the current quarter, our growth rate was 12% versus last quarter's 16% growth rate.

The effect of the three regions Bill mentioned earlier in the call had an impact on our commercial results as well.

In fact, materially more so than on the DIY business.

These markets were a full 17% lower in growth rate than last year in Q1.

Our other regions were slightly below in total last year's results, again, a similar subset of merchandise drove this material decline.

We continue to feel weather probably had some impact on these results.

Certainly had an impact but not the full impact.

We do believe if we experience a more normal winter from a weather perspective, sales will improve in these markets.

Our share is up from what we can see and customer feedback on our performance has been positive.

What is not clear from our numbers is how the productivity from our newer programs is affecting our overall sales per program.

New programs typically open slowly and, therefore, with lower volumes.

With a 34% program increase over the last three years, they've challenged this overall sales per program metric.

In regard to our future, we're focused on building the commercial initiatives that have been in place for the last few years.

We continue to watch our sales force mature.

We're 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 feel our product distribution model is scalable going forward and we are continuing to test additional enhancements to our offerings.

In addition to our focus on further developing and expanding our sales force, we expect to continue adding additional late model import and domestic coverage, both in satellite and hub stores.

And what remains a validation of our ongoing strategy, our Duralast brand continues to gain traction with our customers.

In summary, we remain committed to our long-term growth strategy.

We have accelerated the growth of our commercial programs, having opened over 778 programs over the past 36 months of 34% increase.

We believe we are well positioned to grow this business and capture market share.

The regional variances in our commercial sales results give us comfort our underperforming markets are not solely the direct cause of something we have specifically done.

We believe we can scale this business in a profitable manner.

We continue to be excited about our opportunities in this business for many years to come.

Our Mexico stores continued to perform well.

We opened four new stores during the first quarter.

We currently have 325 stores in Mexico and 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 14 years and we continue to see great opportunity for growth going forward.

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

Regarding Brazil, our store is up and running.

We've had our formal grand opening.

At this point there's nothing noteworthy to report from a sales perspective as we continue to learn more about the market and our customers.

We are currently in various stages of development on future stores.

Our plans are to open 12 to 15 stores over the next couple of years and then slow additional development as we refine our offerings and prove that our concept works for our customers and financially.

Then we will determine our long-term growth plans.

Recapping our first quarter performance for the Company in total, our sales for the quarter were $1.991 billion, an increase of 3.5% from last year's first quarter.

Domestic same store sales or sales for stores opened more than one year were up 0.2% for the quarter.

Gross margin for the quarter was 51.8% of sales, up 71 basis points compared to last year's first quarter.

The improvement in gross margin was primarily attributable to higher margins on merchandise gross, the increased merchandise margins were due to lower acquisition costs.

We also experienced slightly lower shrink as a percentage of sales during the quarter.

In regards to inflation, we have seen some increases in costs year over year, but at a much lower pace than last year at this time.

At this point, our assumption is we'll experience subdued producer pricing heading into the new year and therefore, we feel costs will be predictable and manageable.

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

Looking forward, we continue to believe there remains opportunity for gross margin expansion within both the retail and commercial businesses, however, we do not manage to a targeted gross profit margin percentage.

As the growth of our commercial business has been a steady headwind on our overall gross margin rate for a few years, we have to continuously work strategies to offset this.

Our primary focus remains growing absolute gross profit dollars and gross profit dollars in our total auto parts segment were up 3.4% for the quarter.

SG&A for the quarter was 33.6% of sales.

Higher by 18 basis points from last year's first quarter.

The primary driver on the quarter's operating expenses as a percentage of sales was 34 basis points of deleverage in store payroll, partially offsetting this deleverage was lower advertising expense.

We continue to believe we are well positioned to manage our cost structure for the foreseeable future.

EBIT for the quarter was $363 million, up 6.6% over last year's first quarter.

Our EBIT margin improved to 18.2% or up 53 basis points versus the previous year's first quarter.

Interest expense for the quarter was $41.1 million, compared with $39.1 million in Q1 a year ago.

Debt outstanding at the end of the quarter was $3.803 billion, or approximately $450 million more than last year's first quarter balance of $3.354 billion.

Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR.

While in any given quarter we may increase or decrease leverage metric 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 36.9%, above last year's first quarter of 36.7%.

We expect our full year rate to run in line with this past quarter's results.

Net income for the quarter of $203 million was up 6.4%, versus the prior year's first quarter.

Our diluted share count of 37.6 million was down 8% from last year's first quarter.

The combination of these factors drove earnings per share for the quarter to $5.41, up 15.7% over the prior year's first quarter.

Relating to the cash flow statement for the first quarter of 2013, we generated $318 million of operating cash flow.

Net fixed assets were up 8% versus last year.

Capital expenditures for the quarter totaled $80.4 million and reflected the additional expenditures required to open 24 new stores this quarter, capital expenditures on existing stores, hub store remodel efforts and work on development of new stores for upcoming quarters.

For all of fiscal 2013, our CapEx is expected to be approximately $400 million.

With the new stores opened we finished this past quarter with 4,703 stores in 49 states, the District of Columbia and Puerto Rico, 325 stores in Mexico and 1 in Brazil for a total store count of 5,029.

Appreciation totaled $50.7 million for the quarter, versus last year's first quarter expense of $48.6 million.

With our excess cash flow, we repurchased $317 million of AutoZone stock in the first quarter.

At the end of the quarter, we had $788 million remaining under our share buyback authorization.

We 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 112%.

While we expect we have some room to increase this ratio going forward, we expect the rate of increase to remain modest.

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

We reported an inventory balance of $2.7 billion, up 6.8%, versus the Q1 ending balance last year.

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

Inventory per store was up 2.6%, reflecting our continued investments in hard parts coverage.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 33%.

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

As a last point, I'd like to point out this year, fiscal year 2013, has an extra week in it.

More specifically, the extra week will fall during the fourth quarter.

Already, our longest quarter in terms of number of weeks this year's fourth quarter will have an extra week, taking us to 17 total weeks in Q4.

As a result, our year will end next year on August 31.

The last time we had an extra week in our financials was fiscal 2008 and we would encourage you to review the impact this extra week had on our performance in Q4 2008 to better understand the impact this extra week may have on our fourth quarter and fiscal 2013 results.

Now I'll turn it back to Bill Rhodes.

Thank you, Bill.

Our Company has been extremely successful over the long run.

We remain committed to delivering WOW customer service going forward.

We continue to execute at a high level and it is our incredible AutoZoners now across the globe who work tirelessly to achieve these results.

As we said earlier on our call, our results this past quarter were solid, but not as good as we would have liked.

We continued to experience some unique regional performance differences that weigh on our results.

Clearly, our business has experienced a slowdown over the last several months and we continue to believe a significant amount of that slowdown is likely due to the mild winter we experienced last year.

But, we are still cautious on discussing weather as the entire story.

For one reason, we can't control the weather.

Our charge is to optimize our performance regardless of market conditions and continue to ensure we are investing in the key initiatives that will drive our long-term performance.

In the end, delivering EPS growth of 15.7% and an ROIC of 33% for the quarter are great results.

As we look to the future, the past month's slowdown in industry sales remains a concern and we will continue to manage our business accordingly.

We believe some portion of it is due to last winter's mild winter.

But that likely isn't the entire story.

While we mentioned earlier that our more recent sales results have been better, we are careful not to oversell this point.

As we appreciate the challenging same store sales comparison we have this quarter from last year's Q2.

So while we cannot predict sales, what we do know is we will continue to effectively manage this business through good times, and less good, as evidenced by our 25 consecutive quarters of double-digit EPS growth which included all kinds of macro trends.

As we think about our model, we grow new store square footage at an annual rate of approximately 4%, and we expect to continue growing our commercial businesses at an accelerated rate.

Therefore, we look to routinely grow EBIT dollars in the mid single digit range or better in times of strength.

And we leverage our very strong and predictable cash flow to repurchase shares, enhancing our earnings per share comfortably in the double digits.

This model has been quite successful for an extended period of time.

Before we close, I'd like to reiterate how excited we are about the upcoming acquisition of AutoAnything.

The business and organization the Kleins and their team have built is impressive.

And we look forward to working with them to provide WOW customer service to all of our collective customers.

Additionally, 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 second quarter of 2013 and we are optimistic and excited about the remainder of the year.

Before we move to the Q&A period, I'd like to take this opportunity to recognize and say good-bye to two of our great leaders.

Over the next month, both Lisa Krantz, Senior Vice President of Marketing, and Bob Olsen, Corporate Development Officer, will be retiring.

Both have been key leaders of our organization for more than a decade and their contributions have been invaluable.

They will certainly be missed but they built strong teams and those teams will continue to prosper in their absence.

As we thank them for their past service, we want to wish both Lisa and Bob and their families all the best in their future endeavors.

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

Thank you.

(Operator Instructions)

Christopher Horvers, JPMC.

Hi, this is Rachel Stevens, for Chris Horvers.

Could you provide some thoughts on what's driving the lower shrink and how long this can continue to last?

That's a great question.

I mean, I think our entire organization has really done an incredible job of really focusing on all the elements that we believe cause shrink and so it starts both from an analytical standpoint, it starts with distribution centers, and most importantly it starts with all of our AutoZoners in the stores taking care of our customers.

And so we believe that reducing shrink really starts with great customer service as well as some system enhancements and better inventory management and control, all things that we've worked on over the past I'd say probably two to three years exceptionally hard, and I think you're starting to see those results in the last probably five or six quarters.

And we had good results this quarter as well, and we expect to have slightly favorable trends going forward.

But at some point in time I'm sure it will moderate out.

Great.

Thank you.

Colin McGranahan, Bernstein.

Good morning, guys.

First question, just focusing on the top line weakness and especially in those three regions, understanding the warm weather certainly impacts the need for maintenance and repair as you come out of the winter.

We're now sitting here in November and the weakness in these markets is lingering, perhaps a little bit longer than we might have expected and you might have expected.

Do you have any thoughts on the persistence of it and why that weakness continues to linger so long?

I think it does not necessarily surprise us, Colin.

As we looked at it last year, the brake systems or the chassis systems, they didn't go through the wear and tear due to snow, ice, salt, all those different kinds of things.

That just didn't happen last year.

So as we started seeing this divergence, we did anticipate that it would happen, I think even on our last call we said that we don't necessarily anticipate we'll know the answer to it until we get into the spring.

So I just think it just didn't have the rugged issues that it typically has in those areas during the winter and we're going to have to wait and see what happens next year.

Okay.

So when you look at the categories, and I think in the last call you did a really nice job of that, when you look at the categories of what's selling in the business, say in October, is that not dissimilar to what's selling in the business, say in March or April as you're coming out of the winter?

I would have thought given you had some very hot summer weather in those regions too, in the Plains especially, that just the natural mix of the business of what's happening in October is going to be a little different than what's happening in March or am I just confused?

No, I think you're right.

I think generally you're going to do a lot of maintenance projects in March and in October.

One coming out of winter, one going into the winter, to prepare for it.

But there has been a step function change in our sales patterns and in even our demand patterns, which is where AutoZoners are looking up products in these specific maintenance areas in those regions and it is pretty dramatic in those regions what we've seen and it's persisted since about April.

I think part of the winter last year was a little bit -- was disguised because it was so warm that people were doing some of those maintenance projects earlier than they typically would have, so we didn't really see it until April, but from that point on, it has been very consistent.

Okay.

That feeds into my second question.

Obviously you have that tough compare coming up here in fiscal Q2 against some of that pull forward demand.

Given the trend it looks possible that comps could even struggle more.

You mentioned aggressive, getting that muscle back in action, aggressively managing the cost structure and you did a pretty good job this quarter.

Advertising, you pointed out.

What else are you thinking about either not doing, foregoing, reducing, when you talk about aggressively manage the cost, what specific areas are you looking at?

I would say every single area of the Company.

We're looking at headcount.

We've slowed our commercial openings a little bit.

That will ramp back up as we come into the spring.

We're just -- we want to be cautious as we go into the second quarter.

The second quarter is always the most financially challenging quarter, because it has three different holidays in it.

Our sales performance in those quarters are always the lowest of the year.

So it's always a big concern.

So we're just going to be very aggressive managing every single cost of the Company as we go through Q2, and I think by the end of Q2, we'll begin seeing some signs of what the sales environment is going to look like after we annualize this winter.

Okay.

Good luck.

Thank you.

Thank you, Colin.

Gary Balter, Credit Suisse.

Thank you.

Could you talk about Sandy and what impact that may have had on your sales and you mentioned that business has picked up since the end of the quarter and you attributed part of that to Sandy.

Could you go into a bit more detail on that?

Yes, Gary.

First of all, number one, I apologize for everybody that had the impacts of Sandy.

I know it's been traumatic up there for many of you on this call in the Northeast.

And I hope everybody's doing well.

For our business, Sandy over, say, a three week period of time, was not a material event.

We saw significant deceleration in sales the week of the event and it appears we picked those sales back up over the next couple of weeks.

So I would say it was not a material event in the quarter.

When we talked about sales performance, we said in the last couple of weeks of the quarter.

We did not address the first couple of weeks of the new quarter because we just don't like to get into -- ever get into the sales pattern of the new quarter because we release earnings within two and-a-half weeks, and I just don't want people trying to develop trends off of those short periods of time.

As we think about Sandy, one of the corollaries we have is when we see these kinds of storms in Florida and the Mississippi Gulf Coast, Louisiana, we typically see a pretty nice increase in our business in the region for call it six months or so after the storm because there is a lot of people that do our kind of work that come to the area to do the repairs.

There's also money flowing, whether it's insurance money or FEMA, and in a lot of cases we see a nice pick-up on a regional basis as a result of some of these catastrophic events.

Following up I guess it's also weather related, you constantly mention like the Midwest, Northeast, and the Plains as being weather impacted.

Are there any changes in the competitive environment like for example where, like in Chicago it's become a little more aggressive.

Are there other possible explanations or based on your analysis you're pretty sure this is weather?

I think one of the things we look back on, Gary, is that we believe it's more focused on weather, just from the standpoint that we don't see a lot of changes in competitive behavior that would attribute the kind of sales performance that we've seen since that April time period going forward.

And so we've done a fair amount of analysis on this both from an external factor as well as an internal factor, and when we look at all of that analysis, there doesn't seem to be any actions specifically that we are taking or that our competitors are taking that is resulting in the sales performance that we're experiencing.

And we supplement that by looking at it from a category perspective, as Bill mentioned before.

When you look at a lot of these maintenance categories, they seem to be hit harder than most.

Thank you.

Thank you.

Alan Rifkin, Barclays.

Thank you very much.

When you look at the stores that are collectively supported by the 149 expanded hubs, how are these stores on the commercial side of the business doing relative to the stores that are not yet supported by the expanded hubs?

I think one thing to think about too is that virtually all of our stores are at some level supported by a hub, and you're right, we've got about 67 or so that have expanded.

What's happening on those expanded hubs is that we're able to introduce more coverage and that really is the primary purpose of it, and we are seeing an increase in the sales performance of those satellite stores as well as the commercial programs.

So it certainly gives us the confidence for us to continue to move forward with this initiative of expanding and relocating hubs where we think it's appropriate so that we can get better coverage in those marketplaces.

Okay.

And one more question, if I may.

With the roll-out of the labor management system, when exactly do you expect to realize results of this and can you maybe shed a little bit more color on exactly what you are hoping the system will do for you?

I think at a high level, what we really want to make sure the system does is allow us to allocate our payroll dollars on a more surgical basis, so that we are matching our hours, like any retailer, we're trying to match our hours with our sales demand, not just generically on a Saturday, but more specifically on this individual hours during the week, and specifically on the weekend.

And so the system is up and running within the stores like any good IT system, we're working through issues during the first couple of months but we're getting some benefits out of it.

We're certainly being able to manage and control our models at a more surgical level than we have historically and we'll continue to see benefits.

I can't give you quantification of it right now but ultimately what we're really focused on is improving our customer service by ensuring that we've got the right number of AutoZoners during the right hours of the day.

Okay.

And one last question for Bill Rhodes if I may.

Bill, does the acquisition of AutoAnything accomplish what you believe you now need to grow e-commerce and how exactly are you going to integrate AutoAnything with ALLDATA?

Well, great questions.

We are very excited about AutoAnything and I just want to spend one second and talk about the members of the management team that we've come in contact with, particularly the Klein family.

It was amazing in the first meeting that we had with them, I believe it was back in July, the consistency of our business philosophies, the value structure and just there was a real chemistry there.

So they are very focused on their culture.

I think they're going to be a phenomenal fit for us.

One of the things that AutoAnything does for us is they allow us to reach into a customer segment that we really don't participate in very much, even in our stores, much less over the Internet today.

Their demographics are much higher income demographics.

They're very good at accessories and performance, which are areas where we don't excel at.

We're fantastic on the parts side of the business.

So I think that they are a very nice complement to us.

We will continue to run them.

Our vision is to continue to run them as a standalone Company.

Now, there are tremendous strengths that they have and there are tremendous strengths that we have and we're going to work very collaboratively with them to find those areas of leverage and those areas of synergy so that we can improve the performance of both organizations.

We're really excited.

As for ALLDATA, there's really probably not going to be any significant connections with ALLDATA, but really the connections are going to be with our e-commerce team here in Memphis, which is led by Jamey Traywick, who did a tremendous job working with AutoAnything in assessing this acquisition opportunity.

Okay.

Thank you, Bill.

Thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good morning.

My two questions both relate to commercial.

Seemed like commercial experienced a bit more of a deceleration on a program basis, the decel you saw in DIY, so I was hoping if you boil down on those subcategories within maintenance, within those regions, sort of that real core of softness for you, how do those categories in those regions map to commercial versus DIY.

Almost identical, Matt, except the impact on commercial as you mentioned was a little more significant than it was in DIY.

It's remarkable how focused it is in the same areas of the country and how focused it is in the same categories.

And the next question, a follow-up question, listening to Bill Giles it sounds like you were starting to explore the notion that self cannibalization in commercial might be contributing to the deceleration that you're experiencing on that side of the business.

And any sense you could give us as to the diagnostics that you're looking at and thinking about to make that decision and what evidence might be leading you to think this?

Look.

Clearly, as we open new programs we cannibalize existing programs to some extent, not a tremendous extent, but the bottom line is we have 2% market share.

The fact that we cannibalize an existing store to open a new program, to start that new program, and to grow in that other market area, that's something we're willing to compromise on over the short term.

Over the long term, we need to have substantially more of our stores on the commercial program, and that's our vision and I want to be really -- I want to hit this point crystal clear.

We opened 37 programs in commercial in the first quarter.

We're not going to open a ton of them in the second quarter.

But we're going to open a lot in the back half of the year.

It just doesn't make a lot of sense, particularly when we're dealing with a softer sales environment, to open up a lot of commercial programs going into the second quarter where a lot of the shops are going to be closed three to five days because of holidays and the sales volumes are lower.

And finally, I know you guys are always engaged in the process of self improvement.

Is there anything in particular that you're looking to do differently to drive the top line, given the results of the past couple quarters.

Obviously you've adjusted on the expense side and that has helped protect the bottom line.

Is there anything else that you have in mind for the sales side?

Matt, we are constantly looking for ways to improve.

But at the macro level, we have great confidence in our strategy.

We continue to see that we're gaining market share in both retail and commercial in every way we can look at it and so we're going to stick to our knitting.

That's been a big part of our secret to success over the long term is not to change strategies on a quarter to quarter, week to week basis, to stick to it and execute at an exceptionally high level and that's our plan going forward.

Great.

Thank you so much.

Thank you.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my questions.

Number one, following up on Matt's question about cannibalization, do you think that the self cannibalization has -- there's been any more evidence that it's been more intense in the Northeast as you've put more of your new stores, new commercial programs in those areas, in that area over the last couple of years?

I don't think so.

I don't think that the cannibalization has been really more intense, per se.

I think that obviously we've opened more stores in the last fiscal year than we ever have leading up to that point.

The other thing that's also contributing to it is is that we now have a much larger population of immature programs than we have had in the past.

So to Bill's point, at the end of the day we put a 2% market share so we need to continue to drive our business both on existing programs and some of that's going to come from expanding and relocating the hubs, getting more inventory into the market for same day delivery as well as being able to open more programs.

65% of our stores today have a commercial program and obviously we believe it can be significantly higher than that.

So we're less focused on cannibalization, more focused on market share and just growing EBIT dollars.

And what are you seeing from your customers?

How has the trend in customer turnover on the commercial side been over the last few quarters?

Did that grow more intense in the most recent quarter?

I wouldn't say it grew more intense over the last few quarters.

I do think that -- and we don't want to keep harping on it -- but I do think the sales performance of the three regions that we keep highlighting have just been a lot different than the rest of the country, both DIY and specifically in commercial as well.

And so we look at it from a geographic perspective and we see differences, but on an overall basis I wouldn't say that we're seeing differences on our individual customers.

And my last question is, the improvement that you've talked about in the last few weeks, has that been driven by better performance in these three areas of the country that were particularly weak?

Yes.

I want to be careful not to overdo.

I even said it in our prepared comments.

I don't want to extrapolate two weeks' performance.

It was post Sandy, and clearly we saw improvements in that period of time, and particularly in the Northeast, but also in the Midwest where all of those markets actually turned positive for those couple weeks, but I would just be careful.

We said all along, it's going to be spring before we really know and I don't want anybody to try to extrapolate those couple of weeks that were promising to us, but it's also been 74 degrees down here over the weekend.

We're still looking for winter to hit.

Okay.

Thanks for all the helpful commentary.

All right.

Thank you.

Michael Baker, Deutsche Bank.

Can you talk about what you're seeing in terms of pricing in the commercial side, as you've seen a little bit of slow down, others might as well.

Are your commercial customers getting a little bit more focused on price as their business slows?

I think any time an organization is faced with a challenging sales environment, and clearly, our commercial customers are, they get focused just like we've been focused on how do they improve their profitability.

Yes, there has been a bit more focus on pricing.

I don't want to over-extrapolate that either.

But there's clearly focused on how can they get the best value and we think we provide them with a tremendous value.

So is this causing you guys to lower price and what kind of -- how does that play into your gross margin trends going forward?

I wouldn't try to say that it's going to have a material impact on our margins.

It hasn't at this point in time.

What we want to do is we want to make sure that we're conveying the complete value proposition.

There's a lot of other things that we do.

We've got great pricing today, always have, always will.

But there's other elements that are important to our strategy.

Okay.

And thanks.

One more on this commercial question.

So your commercial sales growth was up less than the growth in the number of commercial stores, so in other words sales per commercial store was down.

we could probably figure this out from all of the data, but if you could just help us.

Is that solely because of adding more immature stores?

I guess here's the question, commercial store this year versus commercial stores last year, this sort of like-to-like commercial stores, are those negative year-over-year or are those positive?

They're not negative.

I think you've got to look at a lot of the immaturity levels of the new programs coming in.

Okay.

Thanks.

Thanks, Michael.

Bret Jordan, BB&T Capital Markets.

Couple quick questions.

One of them being on AutoAnything.

As you focused more into the performance and specialty parts, is that a category you might roll out physically into the stores as well or are you intend to just keep that online?

We have some of it in the stores today but the fact of the matter is that is a very SKU intensive business and so it really affords itself very well for online.

And so we think there's real opportunities to be able to capture market share online and AutoAnything does a really good job on accessories and performance.

We shouldn't think about planograms changing a whole lot?

I wouldn't think about that now.

No, the one thing that I do think --

On the gross margin you had talked about improving acquisition costs.

Is that better pricing from same vendors or is that changing the supply chain more direct, anything on that?

Combination of both to some extent.

We're also getting better pricing.

When you think back over a year ago we had a lot of price inflation that we're not necessarily experiencing today.

That, coupled with the fact that we're getting better pricing, and our merchandising team is doing a great job on sourcing as well.

Is there a tradeoff there?

I guess you're sort of flat on the AP to inventory at 112%-ish.

As you don't take that up, do you get better pricing from the vendors in exchange?

I don't think so.

Okay.

Thank you.

I would now like to turn the call over to Bill Rhodes for closing comments.

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

We're excited about our growth prospects for year.

We will not 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 to succeed for the remainder of 2013 but I want to stress that this is a marathon, not a sprint.

As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful.

Lastly, I'd like to wish everyone a very happy and healthy holiday season and a prosperous new year.

We thank you for participating in today's call.

Have a great day.

Thank you.

This does conclude today's conference.

Thank you very much for joining.

You may disconnect at this time.