汽車地帶 (AZO) 2014 Q4 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

(Operator Instructions)

Please be advised today's call is being recorded.

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

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

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

The conference call will end promptly at 10:00 AM Central Time or 11:00 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, position, strategy, and similar expressions.

These are based on assumptions and assessments made by our Management in light of experience or 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 level, 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 one of our annual report on Form 10-K for the year ended August 31, 2013, 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 2014 fourth-quarter conference call.

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

Regarding the fourth 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, are 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 solid quarter and year.

2014 was a very busy and productive year for us.

We've been growing our business on a variety of fronts.

Our US retail business expanded again in 2014 with the opening of another 148 new stores.

Our commercial business continues to gain traction growing sales 12.8% on a 52 week basis, with 424 net new programs opened.

We now have the commercial program in 77% of our domestic stores, having opened 792 new programs in just the past two years alone.

And we continue to expand our presence in Mexico.

This quarter we celebrated the opening of our 400th store in Mexico.

We opened one additional store in Brazil and now have five stores in operation.

We currently have approximately 8% of our total stores outside of the US, and we believe we have growth opportunities in the United States and beyond for many years to come.

We also expanded our online offerings in both our traditional AutoZone.com and AutoZonepro.com websites, as well as AutoAnything in FY14.

ALLDATA introduced several new products and also continued its expansion in Europe this past year.

Along with theses strategic investments, we spent a lot of time on our core domestic retail business.

Our DIY business remains the largest portion of our sales and continues to generate tremendous returns.

We continue to see significant opportunities for new store growth and improved productivity in our existing stores.

This continues to be our number-one priority.

As our commercial business continues to grow, and it is intertwined with our retail business, we continue to identify opportunities to optimize our inventory placement and distribution strategy in order to respond to the ever-increasing challenge of parts proliferation in our industry.

We began testing a new methodology last year to improve our hard parts placement techniques in all stores.

During this past fiscal year, we completed our testing and implemented this new approach.

We've been able to add additional product while removing unproductive inventory at an accelerated rate compared to our previous methodology.

This has resulted in an increase to our store level inventory.

This increased movement of inventory has also resulted in higher distribution costs.

We've been pleased with our results to date but continue to refine the new process.

As we mentioned during our last quarterly call, we've been testing different delivery frequencies, primarily from our distribution centers.

We've been encouraged by the preliminary results, although we still have more work to do in order to determine the optimal go-forward strategy.

Our tests have shown us that increased delivery frequency increases sales and improves inventory productivity by reducing safety stock.

We now have implemented additional tests to validate our initial findings and provide us with sufficient data to develop the optimal approach.

While we were more aggressive with our inventory additions this past year, we feel future investments will be more targeted and refined.

We believe our growth in inventory per store will continue but at a more modest pace than last year.

As we carefully analyze all of our tests, we expect to have more to discuss in each of the next several quarters.

As we continue to manage this organization to provide exceptional service for our customers, provide our AutoZoners with a great place to work with opportunities for advancement, we must ensure we do it on a profitable basis to provide strong returns for our shareholders.

This process requires us to have a high degree of confidence in our plans before executing on a broad basis.

We'll be holding our national sales meeting in Memphis next week.

All week and again during my address to the team at the conclusion of the event we are introducing the idea of WOW!

EVERY CUSTOMER EVERYWHERE.

We have always been focused on service but this annual operating theme adds intensity and renewed focus.

We've made significant systems enhancements and investments this year in order to capture data about our customers' shopping patterns across all of our platforms.

We understand we have to be able to toggle between the store, the shop, the phone, and online in order to meet our customers' needs.

We'll also emphasize our ongoing inventory availability tests and what they will mean for availability in 2015.

I'd like to take a moment to discuss our pending acquisition of Interamerican Motor Corporation doing business in the marketplace as IMC.

They are the second largest distributor of OE quality and import replacement parts in the United States.

They specialize in parts coverage for European and Asian vehicles.

While considerably smaller than the number-one participant in the industry, IMC with 17 branches today offers an impressive growth opportunity for us.

Not just because of the parts coverage, but also because of the strong management team.

They are an exceptional team.

We do not believe there is a significant overlap with our current commercial customer base and IMC's.

This new customer base is one of the reasons we are excited about this acquisition.

This is a segment of the service repair population that demands OE quality.

While we are comfortable with our ability to grow our current business with our existing model, IMC will be a nice complement to our commercial strategy.

We expect to open a handful of IMC locations in the new fiscal year while also making the IMC parts catalog available to our domestic store base as soon as possible.

We also believe we can help IMC improve its store-level economics.

I do want to stress we will be diligent with our growth strategies here and make sure our financial hurdles are reached as we grow.

We look forward to welcoming the entire IMC team to the AutoZone family soon.

Now let's turn to our fourth-quarter results.

Our sales decreased 1.5%, but on a comparable 16-week basis they were up 4.5%.

Our domestic same store sales were up 2.1%.

This quarter's sales results can be summed up in one word, inconsistent.

While May was quite strong, and June was decent, July was not as strong.

August improved but results were still quite inconsistent from one week to the next.

We attribute much of this volatility to both unique weather and the belief that the low-end consumer continues to struggle.

We are happy to have run both positive retail and commercial comp sales for the quarter, but expected a stronger sales performance in Q4 than we delivered.

Regionally, the Northeast and Midwest performed better than the overall chain.

However, these two markets experienced similar volatility to the rest of the country in July and August.

While our failure-related merchandise categories continued to perform well, our maintenance-related categories were below our expectations.

We attribute much of this category's underperformance to unseasonably mild weather in July and August.

Secondly, in regards to traffic versus ticket in the DIY business, traffic was negative while ticket was up.

The decline in traffic was primarily attributable to the slowdown of our maintenance product sales.

After growing lower than our historical norms over the last year, average ticket growth accelerated in Q4.

Third, we opened 113 new commercial programs in the quarter versus 173 programs last year.

For the year, we opened 424 net programs for the full year, reaching 77% of our domestic store base.

To put our growth in the commercial business in perspective, at the end of 2011 we reported $1.08 billion in total sales, compared to $1.61 billion in 2014, up 50% in three years.

Lastly, I always like to recognize how effective our team delivers consistent earnings in good sales environments and not so good, and that practice has allowed us to deliver an impressive 32 consecutive quarters of double-digit EPS growth.

That consistency allows us to be both shareholder-friendly with solid earnings growth and bond holder-friendly through a targeted investment grade rating and strong cash flow.

We continue to manage this business for both short-term and long-term optimum performance.

As part of our strategy of increasing inventory levels in local markets closer to our customers, this past quarter we opened five additional hub locations.

Over time, we do expect to open more hub locations but we believe our strategy on inventory deployment at the store level allows us to keep the number of openings at a moderate level.

Regarding Mexico, we opened 28 stores this quarter, and reached a milestone of surpassing the 400 store mark.

Our sales in the other businesses for the quarter were down slightly year over year on a 16- versus 17-week basis.

However, as a reminder, ALLDATA and e-commerce which includes AutoZone.com and AutoAnything, make up this segment of sales.

Regarding online sales opportunities, there continue to be great opportunities for growth on both a business to business and to individual consumers or B2C.

While these businesses are small for us, at just 3.6% of our total sales mix on the quarter, we expect these businesses to grow at a faster rate than our brick and mortar business for the foreseeable future.

With the continued aging of the car population, we continue to be optimistic regarding trends for the industry in both DIY and DIFM.

While new car sales have been very strong these past two years, we have seen those traded-in vehicles be resold to new owners who are repairing or enhancing their new vehicle.

With gas prices on average flat year over year for the fourth quarter, we see miles driven relatively flat as well.

As prices at the pump have recently been declining, we expect this to benefit our customers, especially those most financially strapped.

The low-end consumer benefits the most from lower gas prices relative to income.

This trend is encouraging.

I know it's a new year upon us, many investors have asked us about our expectations for 2015 relative to the more difficult comparisons our industry will have in the upcoming winter months.

For us, our second- and third-quarter results are more difficult comparisons.

However, we are optimistic we can grow in all our upcoming quarters.

While certain markets outperformed during the winter this past year, others underperformed.

We believe we should improve in those regions.

As our history has shown, we manage this business focusing on both the long term and the short term, and if we felt our sales would be challenged in the short term due to difficult comparisons we wouldn't make material changes to our plan or operations.

We will continue to balance short-term and long-term performance and will be keenly focused on delivering consistent, strong performance and extending our streak of 32 consecutive quarters of double-digit EPS growth.

Now let me review our highlights regarding execution of our operating theme for 2014, creating customers for life.

The key priorities for the year were, one, great people providing great service.

Two, profitably growing our commercial business.

Three, leveraging the internet.

Four, leveraging technology to improve the customer experience while optimizing efficiencies.

And five, improving inventory availability.

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

This past year we rolled out improvements to our electronics parts catalog.

While this was rolled out to our chain early in the calendar year, we learned some things as the year went on.

We made some modifications along the way.

These changes were around how we displayed product on the screen and presented all the items necessary to do the job right.

These upgrades and our other ongoing ones to the systems we believe have created the best selling tool in our industry.

And our store AutoZoners agree.

We look forward to updating you on the results in upcoming conference calls.

Behind the scenes we have reset our expectations on technology investment, and challenged ourselves to make sure our offerings are relevant across all shopping platforms.

We realized that customers have become much more tech and mobile savvy.

We have to have a sales proposition that touches all the ways they desire to interact with us.

Our current and future technology investments will lead to sales growth across all our businesses.

In regards to commercial, we opened 113 programs during the quarter.

For the year, we opened 424 versus 368 last year.

Our expectation is we will continue to open new programs and grow our percentage of stores with commercial program, although our pace of growth will likely moderate.

As we continue to improve our product assortment and availability, and as we make other refinements to our offerings, we expect that the estimated sales potential from the market will grow.

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

We should also highlight another strong performance in return on invested capital as we were able to finish 2014 at 31.9%.

We are very pleased with this metric as it is one of the best, if not the best in all of hard line's retail.

However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return, well in excess of our cost of capital.

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

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

We have an amazing team and our initiatives for 2015 are exciting.

With our ongoing supply chain initiatives as well as an incorporation and expansion of our acquisition of IMC, we are ready to continue to provide WOW!

customer service to all our customers, and we are ready to continue to prudently manage our cost structure providing our shareholders with the consistency we have exhibited in the past.

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 part sales which includes our domestic retail and commercial businesses, our Mexico stores, and our five stores in Brazil, increased 4.5% on a 16-week versus 16-week basis.

Including last year's extra week, our sales decreased 1.5%.

Regarding macro trends during the quarter, nationally unleaded gas prices started out at $3.67 a gallon, then ended the quarter at $3.46 a gallon, a $0.21 decrease.

Last year, gas prices increased $0.07 per gallon during the fourth quarter, starting at $3.54 and ending at $3.61 a gallon.

We continue to believe gas prices have a real impact on our customers' abilities to maintain their vehicles.

And as cost reductions help all Americans, we hope to benefit from some increase in disposable income.

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 increased in both May and June.

July and August data is not available yet.

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

For the trailing four quarters, total sales per auto parts store was $1.724 million.

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

For the quarter, total commercial sales increased 5.3%.

On a comparable basis, commercial sales increased 11.5%.

For the fourth quarter, commercial represented 18% of our total sales and grew $27 million over last year's Q4.

Last year's commercial sales mix percent was 16%.

This past quarter we opened 113 new programs versus 173 programs opened in our fourth quarter of last fiscal year.

We now have our commercial program in 3,845 stores supported by 166 hub stores.

Approximately 1,200 of our programs are three years old or younger.

Let me take a moment and discuss our commercial program performance.

While our average sales per program is below some peers in our industry at $8,500, it has grown more than 30% since 2009.

It's important to highlight that we accelerated our new program growth over the past few years, as approximately 30% of our programs are younger than three years old.

These openings have impacted our average sales metric and cannibalized some of our older programs.

However, our focus is on growing market share and improving our service levels by having more programs closer to our customers.

Looking specifically at our mature programs, those at least five years old, they averaged $10,000 in weekly sales this past year, and also experienced steady growth each of the last five years.

This year's growth versus last year slowed in these programs but were nicely positive.

We still have significant opportunity to open additional programs over the next several years.

At the same time, we will remain focused on improving the productivity of all our existing programs.

While we can always do better, we feel very good about the success we've had in profitably growing the commercial business.

With our inventory additions and the support of the IMC acquisition, we are well positioned to grow our base business.

Over the last several years, a significant amount of our focus has been on opening new programs, and that will continue to be the case, albeit at a slightly moderated pace.

However, we are heightening our emphasis on increasing sales in our more mature store base in FY15.

We have a very talented sales force and we are enhancing training and introducing additional technology to optimize the productivity of this sales force.

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

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

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

Let me move on to Mexico for a second.

Our Mexico stores continue to perform well.

We opened 28 new stores during the fourth quarter and 40 for the full year.

We currently have 402 stores in Mexico.

Exceeding 400 stores is a terrific milestone and we congratulate all AutoZoners involved in Mexico on this achievement.

We look forward to years of growth here.

Our returns and profit growth continue to be in line with our expectations.

Regarding Brazil, we opened one store in the quarter and have five stores open at the end of the year.

Our plans remain to open a few more stores and then refine our offerings and prove that our concept works for our customers, and is financially viable.

While sales growth has been very encouraging, we are operating currently at a loss.

This is due, as expected, to having such a small store base and carrying a distribution center and overhead that can handle far more stores.

Once we refine our offerings and operations and evaluate the performance, we will talk more on our long-term growth plans.

Recapping this past quarter's performance for the Company, in total our sales were $3.050 billion, an increase of 4.5% on a comparable 16-week basis from last year's fourth quarter.

Domestic same store sales or sales for stores opened more than one year were up 2.1% for the quarter.

Gross margin for the quarter was 52.3% of sales, up 48 basis points.

The improvement in gross margin was attributable to lower acquisition costs and lower shrink expense, partially offset by higher supply chain costs associated with current year inventory initiatives.

In regards to inflation, it has been basically nonexistent year over year.

This is different than in past years.

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

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

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 margin percentage.

As the growth of our commercial business has been the steady headwind on our overall gross margin rate for a few years, we have not specifically called out the headwind quarterly.

It is part of our business model and we understand we have to manage that headwind as the business grows.

Additionally, IMC will be a slight drag on gross margins as this business model operates at a lower gross margin rate.

Our primary focus remains growing absolute gross profit dollars in our total auto parts segment.

SG&A for the quarter was 31.6% of sales, higher by 37 basis points from last year's fourth quarter.

The increase in operating expenses as a percentage of sales was primarily due to a combination of deleverage from the 17th week of sales last year, higher incentive compensation, and planned information system investments.

IMC will also have a slight impact on SG&A dollars in the upcoming quarters.

While these expenses will cause slight deleverage, we expect they will have lasting benefits to the overall organization.

We continue to believe we are well positioned to manage our cost structure in response to our sales environment.

EBIT for the quarter was $630 million, down 0.9% over last year's fourth quarter.

Our EBIT margin improved to 20.7%.

Excluding the extra week, our EBIT margin was up 22 basis points and our EBIT dollars grew by 5.7%.

Interest expense for the quarter was $49.4 million, compared with $57.4 million on a comparable basis in Q4 a year ago.

Debt outstanding at the end of the quarter was $4.344 billion, or approximately $160 million more than last year's balance of $4.187 billion.

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

While on any given quarter, we may increase or decrease our leverage metric based on Management's opinion regarding debt and equity market conditions, and 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 35.7%, up from last year's fourth quarter.

We expect our annual rate to be closer to 36.7% on an ongoing basis as the deviation in results is primarily driven by the resolution of discrete tax items that arise.

Net income for the quarter was $374 million.

Excluding the extra week, net income was up 7.4%.

Our diluted share count of 33.1 million was down 7% from last year's fourth quarter.

Combination of these factors drove earnings per share for the quarter to $11.28, up 15.6% over the prior year's fourth quarter on a comparable basis.

Relating to the cash flow statement for the fourth fiscal quarter, we generated $370 million of operating cash flow.

Net fixed assets were up 8% versus last year.

Capital expenditures for the quarter totaled $176 million, and reflected the additional expenditures required to open 113 new stores this quarter, capital expenditures on existing stores, hub store remodels, work on development of new stores for upcoming quarters, and information technology investments.

For all of FY14, our CapEx was approximately $440 million.

With the new stores opened, we finished this past quarter with 4,984 stores in 49 states, the District of Columbia, and Puerto Rico.

402 stores in Mexico, and five in Brazil for a total store count of 5,391.

Depreciation totaled $79 million for the quarter versus last year's fourth-quarter expense of $71 million, in line with recent growth quarters.

With our excess cash flow we repurchased $188 million of AutoZone stock in the fourth quarter.

This was lower than last year's buybacks with the extra week last year and the EBITDA it generated provided additional leverage capacity.

At year end we had $869 million remaining under our share buyback authorization, and our leverage metric was 2.5 times.

Again, I want to stress we manage to appropriate credit ratings and not any one metric.

The metric we report is meant as a guide only as each rating firm has its own criteria.

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 115%.

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

We reported an inventory balance of $3.1 billion, up 10% versus Q4 ending balance last year.

Increased inventory reflects new store growth along with additional investments and coverage.

Inventory per store was up 5.8% at $582,000 per store, reflecting our continued investments in hard parts coverage.

This per store amount was down from Q3's $594,000 per store.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.9%.

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

Now I'll turn it back to Bill Rhodes.

Thank you, Bill.

We are pleased to report our 32nd consecutive quarter of double-digit EPS growth, and for the year to report an EPS growth rate of 16.3% on a comparable 52-week basis.

Our Company has continued to be successful over the long run.

That success is attributable to our approach of leveraging our unique and powerful culture and focusing on the needs of our customers.

To execute at a high level, we have to consistently adhere to living the pledge.

We cannot and will not take our eye off of execution.

While we study the external environment and react where appropriate, we must stay committed to executing day in and day out on our game plan.

Success will be achieved with an attention to detail and exceptional execution.

Before I conclude, I want to take this opportunity to reflect on FY14.

We were able to build on past accomplishments and deliver some impressive results.

In recognition of the dedication, passion, and commitment of our AutoZoners, I want to highlight that in 2014 we grew sales in all of our businesses.

With this growth we were able to achieve and comfortably surpass the $9 billion annual sales milestone for the first time on a 52-week basis.

As previously mentioned, we opened our 400th store in Mexico.

We reached a definitive agreement to acquire IMC.

We believe IMC is the right business at the right time for us.

The Management team at IMC is exceptional and we can't wait to grow the business for many years to come.

Our inventory availability testing and hub store remodels have been nothing short of incredible.

We've learned a tremendous amount and believe our findings will lead us to a more productive model.

We are talking more than ever about innovation.

As the industry leader, it is imperative that we stay ahead, making sure every aspect of our offerings is improved, from inventory assortments to our commercial offerings to leveraging the power of information technology enhancements, we can leave no stone unturned.

We invested more in information systems infrastructure this past year than in recent memory, an investment that will pay dividends for years to come.

At the end of the day our customers have choices and we must innovate to ensure they turn to us for their vehicle needs.

Again, we are excited about our initiatives around inventory assortment, hub stores, commercial growth, Mexico, ALLDATA, e-commerce, Brazil, and now IMC.

Our long-term model is to grow new store square footage at a low-single digit growth rate, and we expect to continue growing our commercial business 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 growth into double digits.

We feel the track we are on will allow us to continue winning for the long run.

We believe our steady, consistent strategy is correct.

It is the attention to details and consistent execution that will matter.

Our belief is solid, consistent strategy combined with superior execution is a formula for success.

Our charge remains 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 strong EPS growth and ROIC each and every quarter is how we measure ourselves.

We are pleased with our results this past year but we must remain committed to delivering on our strategic and financial objectives.

I can't wait to sit down and talk with our leadership team at our upcoming national sales meeting.

This team is comprised of the best leaders in our industry.

We are launching our WOW!

EVERY CUSTOMER EVERYWHERE theme, and I know our leaders combined with our talented team of more than 70,000 AutoZoners will do just that.

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

(Operator Instructions)

The first question is from Alan Rifkin with Barclays.

Thank you very much, and congratulations on another nice year.

Thank you.

First question for Bill Rhodes: As you look longer term with respect to IMC, how should we think of that company long term as a proportion of your revenues?

And how will you integrate this at all in a little bit more detail with both your store base as well as AutoAnything?

Thank you.

Thank you, Alan.

It's a great question.

First of all, I want to update everybody that on last Friday, we received HSR clearance, and so we are working towards closing the deal, and hopefully can do it in the next week or so.

So, at this point in time, our integration efforts, as you would expect as we were going through the regulatory approval process, have been minimal, but we'll start working that diligently as we go forward.

With respect to our growth plans, they currently have 17 branches, and there is considerable opportunities for growth.

You can look at the other key player in the industry, and they have over 100 branches.

So, we look to roll out additional branches.

Three of their branches are new this year, and are off to a great start.

So, we're encouraged about the long term with them.

Additionally, we think that they can be leveraged, particularly with our other stores -- AutoZone stores -- on both the retail and the commercial side.

They have a product offering that we don't have today.

So, we're very excited about them joining the family, and hopefully that's going to happen in the next week or so.

Okay.

Thank you.

And one follow-up, if I may, for either of the Bills.

Is there any structural reason why your less mature commercial stores, which are doing $8,500 a week, cannot get to the level where some of your more mature units are doing, which is over $10,000 a week?

Let me clarify that.

The $8,500 was on average all of our stores, Alan.

The more mature stores are averaging $10,000.

The newer stores are even below the $8,500 level.

But we've been very pleased, as we continue to grow at a very rapid pace, opening almost 800 new programs in the last two years.

But those new programs are continuing to perform at or above where the older program started.

So, we believe we have a long-term opportunity for them to be very productive.

We also believe the stores that are doing over $10,000 are nowhere near where they need to be, and we have continued growth opportunities with them.

Okay.

But just to clarify, Bill, so even though some of the units which you've added most recently, you still think that collectively over the longer term they can achieve revenue levels and profitability levels of some of your more mature ones?

Is that fair?

Yes, that's absolutely fair.

Thank you very much.

And hopefully beyond that, Alan.

Yes.

Thank you.

The next question is from John Lawrence with Stephens.

Good morning, guys.

Good morning.

Bill, would you comment -- to follow on Alan's question just a little further -- that gap of some of those clients or stores where you don't have that merchandise or that line card available, can you just give us a sense of some of those stores and what you'll have available for those that you don't have today?

And how large of an opportunity is that?

Well, the IMC product offering is vastly different than ours.

It is a branded offering that is OE quality, OE manufacturers, that we don't necessarily have in our product offering today.

There are certain customers -- think about the high-end BMW or Mercedes shops -- that want to use those products and use them pretty much exclusively.

We don't do business with many of those shops today.

However, we do have a lot of shops that are doing that kind of work, and in certain cases, want those kind of products.

This will now allow us in our commercial program to sell those cases or those products to our existing customers as well.

Great.

Thanks.

And just a follow-up for Bill Giles: On the G&A, as far as technology investments and incentive comp, should those stay about the same level going forward?

I would say that, obviously from a management team perspective, we hope the incentive comp continues to go up.

But I would say that, from an IT perspective, we will continue to expect to have some investments in IT over the next fiscal year or so.

As Bill highlighted earlier, there's several things that we've done from a store system structure perspective in order to enhance the information that we're providing our AutoZoners, which is ultimately providing to our customers.

We think there's some real opportunity for that, as well as tying all of our customer information together so we have a better visibility on the activities of our customers.

Thanks.

Good luck, and congrats on the year.

Thanks.

The next question is from Dan Wewer with Raymond James.

Thanks.

Bill, we've had five consecutive quarters that inventory per square foot has grown between, call it, 4.5% to 8.5%.

I would have thought by now that these initiatives would have had enough time to get some traction and generate better sales productivity.

It sounds like you're continuing to refine the test, particularly regarding distribution frequency.

Just curious as to why you think that the payoff hasn't materialized by now, and what kind of time frame would you advise investors to take with a payback?

It's a good question, Dan.

And I think that you're looking at it the right way.

I mean, we recognize the importance of hard parts coverage.

And every time we add inventory, we recognize that it benefits both the commercial side of the Business, as well as the DIY side of the Business.

Keep in mind, too: We're fortunate to be operating in an industry where there's very low obsolescence on inventory, and there's very low financing cost at the moment.

So, we think that this is a very good risk/reward strategy to be taking.

And it's an important one for us to continue to gain market share with our customers.

And another leg of the stool is really the delivery frequency.

So, we've added more inventory, particularly at the store level, and then we're also testing the optimization of the frequency of delivery and the method of delivery to both our satellite stores as well as ultimately to our customers.

And so, there's more work to be done on there.

I think that the tests would show that we've gotten some good returns on the investments that we've made.

They've been broad based in some cases, but frankly not all across the chain.

Many of the tests that we're doing are very isolated, and in those cases, we're very encouraged with the results that we have.

There's more learning to be done, and there's more work to be done.

But we think that adding inventory, like I said before, is very good from a risk/reward perspective.

We don't see a lot of exposure because, again, it's not fashion, it's not technology based, so we think it's a good way to continue to capture market share.

And then we've got to continue to work with delivery frequency to optimize our overall supply chain.

Just to clarify: Is there a bottleneck, so we've added inventory either at a distribution center or at a hub, but there's a bottleneck that's preventing it from getting to the store and effectively sold to your commercial customer?

The one thing to think about, and we've always talked about this, is that 70% of the SKUs that we carry are one -- one on hand.

So, there's an incredible randomness on a lot of the sales of some of this inventory.

Your ability to predict and to stay in stock is what really becomes challenging.

I wouldn't consider it a bottleneck, per se.

I think we've got distribution centers, we've got hub stores, and we've got our individual stores.

And it's really: Where do we have the inventory, where's the safety stock, and then the frequency of delivery.

And those are the things that we're working on right now.

One follow-up question: You noted that the year-over-year comparisons become a lot more difficult in your second quarter of FY15.

But at the same time, you do have some weaker markets that could recover.

I'm assuming you're talking about the West Coast; given the drought conditions out there are expected to continue next year, what makes you confident that those lagging markets would recover this coming year?

Obviously, we can't predict the future, but we did have a lot of strength in the second quarter, particularly in the Northeast and the Midwest.

I would also say it wasn't just a geography issue.

In the second quarter of last year, we performed particularly well on the failure-related categories.

But even at the time, we spoke to the fact that the maintenance-related categories -- think about all the under-car things that could be deferred -- have saw significant decreases.

So, yes, we had a strong quarter.

We had strength in certain categories and certain geographies.

At the same time, the West was weaker and certain categories were weaker.

Thank you.

Thank you.

Thank you.

The next question is from Seth Basham with Wedbush Securities.

Good morning.

Good morning.

The first question I had is just regarding some of your distribution plans.

It seemed to me that you were talking a little bit more about testing more overnight, more frequent delivery from the DCs to stores, rather than focusing on the utilization of hubs; is that correct?

And can you give us some more information on your thinking there?

Yes, that is correct.

We have several different tests that are going on.

Let me go back and remind you.

We talked about something we called optimal hurdle, which was refining the store SKU placements across the entire store network.

We finished that testing last summer, and have rolled that out.

We have been very pleased with the results of that to date.

A couple of the other key tests are: Would an increase in delivery frequency from our distribution centers to our stores be a productive use?

And we've been testing that for about eight or nine months now, and so far we're pretty pleased with the results.

Now we're taking it to the next level and saying: Okay, let's vary the delivery frequency.

Instead of five days a week, what happens at two days a week, what happens at three days a week, so that we can find the optimal approach.

We're also testing something which is an expanded SKU coverage, even beyond our hub stores, in a select number of -- we call them mega-hub stores.

And those mega-hubs are also servicing the other hub stores in the area, further extending our same-day, local market availability.

So, we're still very much in test phase.

We hope to be bringing some of these tests to conclusion over the next several months.

And then once we make those decisions, we will communicate them with you.

Great.

That's helpful.

And just thinking about some of the mature programs, you talked about the growth in these commercial programs -- still improving but at a slower rate.

What do you think is driving that slowdown, especially given the fact that you're adding a lot of inventory and what not?

Is there cannibalization going on?

Is it more market dynamics?

How do we think about that?

I think a big part of it is the cannibalization.

As we've opened these new programs, remember: Several years ago, we had 51% of our stores that were on the commercial program.

We're now at 77%.

When we open a program in an existing market, we take the customers that are closer to the new program, and we move them to that program.

So, there's a fairly significant amount of cannibalization that's in there, and that's impacting those growth rates.

But overall, we wanted to make it clear to you all, we're making progress, and have been over the last five years, and are pleased with it.

Never going as fast as you want it to.

Great.

Thanks, guys.

Good luck.

Thank you.

Thank you.

The next question is from Simeon Gutman with Morgan Stanley.

Thanks.

First, on -- you mentioned in the prepared remarks that August was better, but inconsistent.

Can you touch on September, if appropriate?

And then, looking at August, maybe just the past few months, while whether it's weather, mix of business or some secular trends, can you help parse that out?

And if there are markets that haven't had any weather noise, can you tell us where the underlying run rate is?

As far as August is concerned -- let me just say this.

Every period for us in the quarter had a positive same-store sales growth.

August was certainly better than July, which was our weakest point.

In September, we have a policy of really not talking about what's going on in the current quarter because we release our earnings so early in the quarter.

We're just barely three weeks in.

So, we don't think it's prudent for us to share what's going on in September so far.

As far as what was driving the trajectory, you could very easily see it in the weather and the weather-related categories.

So, things like AC chemicals, AC and heating, cooling systems -- all of those categories were weak for the entire quarter, and particularly weak in July and in certain select weeks in August.

So, to us, it was very much: When the weather cooperated, our sales were strong; when it didn't, they didn't.

Okay.

And then, second, about next year -- mentioning those tough compares -- can you talk about the comp that's required to lever the expense line?

I think the Business right now is doing great on the gross margin, so it's helping the gross profit dollars.

Does the composition at all change?

Does the SG&A flex a little bit?

And what's the right level for next year?

That's a good question.

It's one that I think varies a little bit.

The reality of it is, if you look over time, we're going to adjust our expense structure based on the sales environment that we're operating in.

So, we're ultimately focused on growing EBIT dollars, and so we'll have some opportunities in gross margin.

We may make some investments in SG&A.

But we'll manage those over the long term based on the sales environment that we operate on.

So, it's hard to give you a static number, per se, because at times we've leveraged on very low comps, and at times we've deleveraged on higher comps.

And so, we'll just continue to look at the strategies that we have in place and the investments that we think will help us out on a long-term basis, and we'll adjust them based on the sales environment we play in.

Okay.

The lower acquisition costs that were cited this quarter, is that normal course of business or did something else change that triggered your ability to lower the COGS?

I would say that that's probably more normal course of business.

I think better work with the merchandising organization on lowering some of the acquisition costs, either through sourcing -- there's probably some deflation in certain categories, and that's probably what's drove it mostly.

Okay.

Thanks, and good luck.

Thank you.

Thanks.

Thank you.

The next question is from Michael Lasser with UBS.

Good morning, guys.

Thanks a lot for taking my question.

I was hoping you could benchmark where you think your parts availability and your delivery frequency capabilities are relative to your peers.

We know that you've made good strides in the last several quarters, but I think the challenge is: We don't know really order of magnitude where you are today versus where you were, and what you're trying to get to?

On the delivery frequency, we've had a long strategy of: We deliver the vast majority of our stores once a week.

We have competitors that are out there that deliver their stores on a daily basis.

We are in the process of testing delivery frequency.

And I want to emphasize the word test.

We're talking about a few hundred stores that are on this delivery frequency test.

So, what's going on in those stores is not showing up in our overall numbers in any material way.

We're going to go out and see what increased delivery frequency means.

As I mentioned earlier, we've been pleased with what we've seen so far.

No surprise, as we get inventory closer, and as Bill mentioned, 70% of our SKUs have one piece on the shelf, normally.

In our current structure, if we sell that piece, we're out of it for up to eight days.

This allows us to put it back on the shelf within 24 hours.

So, we're encouraged, but we haven't made any final decisions yet.

Okay.

And in those stores where you have increased frequency, what has been the profitability impact?

Presumably it's a lot more expensive to do that.

It is more expensive, and we've got four or five different tests in different markets right now, and they had mixed results.

The longest-running test is showing that it's EBIT positive, and that it's generating a 15% IRR or better.

So, that's the threshold that we're going to hold any investment to.

What we're trying to be careful of is: These will be some decisions that have long-term ramifications.

So, we're wanting to make sure that we prudently test them, and that we validate our test results, and then determine what's the right number?

Should it be twice a week; should it be 5 times a week?

We don't know that answer yet.

Okay, and just to tie all those things together, if you were to get to daily replenishment or multi-week, multi-times per week replenishment, would you have to necessarily sacrifice your profitability rate in order to do that?

I wouldn't say we -- we're not going to sacrifice our EBIT growth rate, per se.

So, at the end of the day, this is about driving EBIT dollars and driving an acceptable IRR, which is about 15% for us.

So, that's kind of the way we think about it.

That's the way we focus on it is: Look, is this going to generate us more profit dollars?

Are we going to get an adequate return on the investment that we make?

And that's how we look at it.

We're not getting hung up on an absolute margin rate, per se.

Okay.

Thank you very much.

Thank you.

Thank you.

The next question is from Aram Rubinson with Wolfe Research.

Hi, guys.

Good morning; thanks for taking the question.

I understand that some of the commercial business is kind of cannibalizing from your mature stores.

You're still at 18% of your mix is commercial.

I'm not sure whether you have a particular goal of where you'd like to be, but it seems -- from just reading and studying the industry, it seems like that wants to go a lot higher.

So, my question is: Is there a reason that you can think of why we're cannibalizing from ourselves rather than taking business from others who seem to be growing their kind of comps from that commercial program?

And do you get a sense that we're all kind of just piling into the same strategy at the same time, and maybe that's making it more difficult competitively?

I would say the cannibalization is just a natural effect.

If we open a store that is closer to a customer than the existing store that's servicing it, just makes all the sense in the world for us to move that customer over to the new store, so we can service them better.

Delivery times will be shorter and so on and so forth.

So, I think it's not that that's the only way we can do it; that's just the natural course of business.

Yes, we only have 18% of our sales in commercial today.

That's up from 16% last year.

It's nowhere near where we want it to be.

We believe that we have a long-term opportunity to continue to grow commercial in an aggressive way.

We have not set any specific number because we don't want to maximize or put a threshold on where we're going.

We want to be as big in both businesses as we can be.

As far as the piece about growing in this business, I think it just takes time.

We've been in this business the shortest amount of time.

We've really had a successful growth rate over the last six or seven years.

And we're very [confident] on the track that we're on and with the strategies that we have.

Thanks.

On the DIY side, can you tell us a little bit about your market share -- whether you feel like you're growing that market share or if that's kind of stagnating or slipping?

And then also, where does eCommerce fit into that market share equation on the DIY side?

Is that beginning to make any material inroads?

Thank you.

On the eCommerce side, when we look at the industry, broad based, we think that there's some opportunity for online sales, although it isn't a significant penetration like it is in other industries.

We recognize that a lot of people are coming for information relative to be a content of the product or repair information, et cetera.

So, we think that it's an integrated approach overall, and that's how we're approaching it.

From a market share perspective, I think we're holding our own.

And so, our growth rate seems to be close to what the overall industry is growing at.

At the same time, we're growing square footage growth rate at about 3%.

So, overall, I think we're holding our own from a market share perspective.

Thanks, guys.

Thank you.

Thank you.

The next question is from Matthew Fassler with Goldman Sachs.

Thank you so much, and good morning.

My first question relates to the IMC acquisition.

If you could shed a little bit of light on the economics of the business, the revenue per store compared, for example, to a core AutoZone store, the role of online in that business?

And then also, just give us a sense as to the pace and the impact of the prospective rollout of their catalog to your AutoZone stores.

IMC overall revenue is around $10 million per location -- is about what they average overall.

And so, as far as what the overall impact will be on us on an ongoing basis, as Bill mentioned before, once we kind of get through the close, and get our implementation plan integrated and started, we'll be able to give you a little bit more color.

I think in terms of getting it into the catalog, obviously we would expect that to transpire in FY15.

So, we expect that to happen sometime in the fiscal year.

I'll give you a better idea of that on the next conference call.

But overall, it's good productivity.

It's a great complement from an inventory perspective and certainly from a customer perspective, and it's a great management team.

So, we think those combination of things will help the integration go even quicker.

Bill, if you think about the role of eCommerce in their model compared to what you see for the core AutoZone stores, as you discussed to the last question, is it similar or greater would you say vis-a-vis your core business today?

I would say it's probably a little bit greater.

I think that there's an opportunity from an online ordering perspective with commercial customers.

I also think that there's probably a broader base from an eCommerce perspective for their product as well.

So, I think that that product probably has even more opportunities online.

And then my second question relates to the pace of the buyback.

In recent years, your buyback in the final quarter of the fiscal year has been the largest of the year.

I guess in part due to the length of the quarter, and there might be other reasons associated with seasonality, et cetera.

This year, that was not the case.

How should we think about the way you managed the buyback in the quarter this year, and what it tells us, if anything, about the pace of buybacks going forward?

That's a good question.

We purchased about $1.1 billion.

I think we did about $1.3 billion last year.

As we mentioned, the extra week of the quarter last year certainly helped a little bit last year.

So, that's some of the differential.

If you think about it, we bought back about $1 billion over the past six years.

And so, we think that that's a cash flow number that we can maintain going forward, if not better.

We're also consciously trying to spread it out over the year as well, and not make it as chunky as it has been.

So, those are some of the factors that go into that.

But I wouldn't think about the fourth quarter as being light in terms of being a trend.

I would look at it as $1.1 billion versus $1.3 billion, and the $1.3 billion [got juice] a little bit with the extra week last year.

Got it.

Thank you so much.

Thank you.

That concludes the question-and-answer session.

I'd like to turn it back to Mr. Rhodes for closing comments.

Great, thank you.

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

We are excited about our growth prospects for the year.

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

We have a solid plan to succeed this fiscal year, but I want to stress that this is a marathon and 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.

We thank you for participating in today's call.

Thank you.

This does conclude today's conference.

Thank you for joining.

You may disconnect at this time.