汽車地帶 (AZO) 2015 Q1 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, 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 statements 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 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 1A under Part 1 of our annual report on Form 10-K for the year ended August 30, 2014, 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 2015 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 to 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 solid quarter, and a very good start to the new fiscal year.

We remained focused this past quarter on several key initiatives and on growing our Business on a variety of fronts.

I thought I'd begin this morning recapping the various aspects of our Business, as it has become more complex in recent years.

We have diversified our portfolio, with an emphasis on building additional legs of growth.

First, we have our retail domestic business, which generates approximately 70% of our revenue.

This business performed quite well in Q1, and we continue to see opportunities for future growth in store count and same-store sales.

Secondly, we have our commercial domestic business, which has been growing sales by double digits for five years, and continues to be a tremendous growth opportunity.

We also have international retail and commercial businesses in Mexico and Brazil.

We've been doing business in Mexico since late 1998, and our model has proven to work quite well.

In Brazil, we are still in test phase, but our sales have continued to grow nicely.

We also have a growing internet business, supported by both autozone.com and AutoAnything.

And we have our ALLDATA business, which is the leading diagnostic and repair business in the United States.

We've expanded that business to both Canada and Europe in recent years.

And finally, we recently acquired IMC, which focuses on the import parts business, and provides us with a new growth opportunity and new avenues to provide AutoZone customers with an expanded product assortment.

This past quarter, our US retail business expanded with the opening of 22 new stores.

We also opened 61 net new commercial programs.

Our commercial business continued to gain traction, growing sales 13% for the quarter.

We now have commercial programs in 78% of our domestic stores, having opened 816 new programs in just the past two years.

And we have opened four new stores in Mexico during the quarter.

In Brazil, we continue to operate five stores, and expect to open a couple of new ones over the next few months.

We currently have approximately 8% of our total stores outside of the United States.

We believe we have growth opportunities in the US and outside the US for many years to come.

In the first quarter, our sales accelerated on a same-store basis compared to last quarter.

We reported a same-store sales increase of 4.5%, up from 2.1% in Q4 of last year.

We were pleased to see we gained traction in sales categories where we've added merchandise, and our commercial business benefited from both the inventory additions and the diligent focus on growing sales in our older programs, with particular emphasis on mature customers.

We were pleased with our sales performance throughout the quarter, but our DIY business was particularly strong in the last two weeks, when much of the country experienced the first significant cold-weather spell.

Our results were also generally consistent across all regions of the country.

While the weather experienced at the end of the quarter accelerated our growth even further, our sales throughout the quarter were noticeably improved from Q4, in virtually every week.

Our belief is that the reduced gas prices are giving our customers additional disposable income, and helping drive our sales.

Additionally, and more importantly, we believe the work we have been doing over the last year on inventory availability is also contributing to improved sales performance.

Over the last year, we have implemented our new algorithms for inventory assortments, and those products have been in our stores now for over six months.

These are generally slower-moving products, but as our customers experience the improved depth of our inventory, these products are continuing to gain traction.

Overall, we were quite pleased with our sales performance in Q1.

Our inventory per store increased over our Q4 2014 levels.

The primary driver of this increase was the inventory added through the acquisition of IMC.

The IMC stores carry, on average, 8 to 10 times the inventory per location our basic AutoZone stores do.

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

Additionally, when we implemented our new assortment methodology last year, we made a decision to only execute half of the deletes of underproductive merchandise in order to mitigate the potential risk of such a significant change.

We are in the process of executing the additional deletions over the next few quarters.

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

We will continue to assess and analyze our changes, and we will continue to refine our methodologies over time, but the majority of this initiative will be completed once the additional deletions are removed.

Secondly, as we mentioned during the last several quarterly calls, we have been testing different delivery frequencies from our distribution centers.

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

The important takeaway here is we continued to expand these tests, and have added more stores to these tests.

As we've been testing for about a year, our results to date have been encouraging, and we plan to further expand the test in Q3.

Once we have confirmed our findings, we will develop a long-term plan, and explain our strategy and its ramifications to you.

We would expect to do this in the next couple of quarters.

Ultimately, assuming our findings are confirmed, we would expect to increase the delivery frequency to most of our stores, and we would expect to add two to three additional distribution centers to do this cost effectively and on a timely basis.

Additionally, we've been testing what we call mega-hubs.

Mega-hubs have substantially increased product assortment, and they leverage those increased product assortments across other hub networks, providing stores, across a large geography, access to this expanded assortment.

We've been testing two mega-hubs for about a year.

Both of them have been performing well, and we will be opening three additional mega-hubs over the course of this fiscal year.

This, too, is still in test phase, but we are pleased with the performance to date.

All of our inventory availability initiatives are designed to significantly increase our ability to meet our customers' needs.

In this business, inventory availability is a must, and we believe, once this work is completed, we will materially improve our ability to fulfill our customers' requests.

As our commercial business has grown, our need for expanded assortments has grown even more.

Again, we are continuing to test, and we are expanding our test to validate our findings to date.

We will keep you abreast of these developments.

This has been important and difficult work, and I would like to thank everyone in the Organization who has been involved with this initiative for their excellent work to date.

Last quarter, we held our national sales meeting here in Memphis.

This year's operating plan theme -- wow every customer, everywhere -- was very well received.

The customer's our central focus in everything we do; or, like we say at AutoZone, AutoZoners always put customers first.

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

We've made significant systems investments and enhancements this past year in order to capture more 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 experience, in order to meet our customers' needs.

At the national sales meeting, my favorite event every year is our recognition luncheon, hosting our award-winning store managers, or as we call them, our Presidents Club.

It's an opportunity for our officers to meet and answer questions from our best and brightest store AutoZoners.

This year was certainly no exception.

These store award winners deserve our gratitude for their efforts each and every day.

Now I'll take a moment to discuss our recently completed acquisition of Interamerican Motor Corporation, doing business in the marketplace as IMC.

They are the second-largest distributor of OE quality 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 a terrific growth opportunity for us; not just because of the parts coverage, but also because of the very strong management team.

They are an exceptional team.

We closed on the acquisition in September, and we've been fast at work on getting our integration plan in place.

While it's very premature, I will mention our plans include opening more IMC branches, and incorporating their parts catalog into our AutoZone Z-Net parts catalog.

We will continue to go to market as IMC, and expect to open a handful of new IMC branches over the next 12 months.

We also expect to have their catalog available in our stores by early spring 2015.

I do want to point out: There was very little customer overlap with our commercial customer base.

Now, let me stress: The IMC brand is very important to us, and we will grow that brand and its presence in the future in many more markets than what it is in today.

IMC has been in a growth mode recently, and has built an infrastructure to support a substantially larger footprint.

Therefore, it currently doesn't enjoy the operating margins that we experience, so it will lower our overall EBIT margins by approximately 40 basis points on an annual basis.

We are very excited to have IMC as part of our Organization, and very optimistic about our future together.

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

Our sales increased 8%, and our domestic same-store sales were up 4.5%.

As mentioned previously, our sales improved significantly from Q4, and each month both retail and commercial experienced positive same-store sales growth.

That consistency was across all regions of the country.

We believe we benefited from both macro tailwinds, our work on inventory availability, and solid execution.

While our failure-related and maintenance-merchandise categories performed well, we were especially happy to see the growth in our maintenance category.

Regarding traffic versus ticket, in the DIY business, traffic was negative while ticket was positive.

While only slightly negative, traffic improved as the quarter went along, and was nicely positive at the end.

Our average ticket improved significantly, and has returned to more normalized levels after about a year of subdued growth.

The [hard] parts additions we've added to our stores have helped ticket growth.

Over the last two decades, our traffic count has been challenged.

The primary driver of this challenge is the improvements in product quality, which has led to fewer failures or longer maintenance intervals.

But those improvements have come from technological advancements, and those enhancements have significantly increased the price of the products we sell.

We have been managing through this phenomenon, as mentioned, for over two decades, and expect to continue to do so quite well.

We opened 61 new commercial programs in the quarter, versus 125 programs in the comparable period last year.

We now have a commercial program in 78% of our domestic store base.

Our commercial sales, excluding IMC, were up 13% this quarter.

Lastly, I always like to recognize how effective our team delivers consistent earnings in good sales environments and not so good.

That practice has allowed us to deliver an impressive 33 consecutive quarters of double-digit EPS growth.

That consistency allows us to be both shareholder-friendly with solid earnings growth, and bondholder-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 four stores this quarter.

Sales in our other businesses for the quarter were up 6.4% over last year's first quarter.

As a reminder, our ALLDATA and eCommerce, 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 basis and to individual customers or B to C. While these businesses are small for us, we expect them 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 our 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, down materially year over year for the first quarter, we are beginning to see miles driven increase.

Declining prices at the pump have benefited our customers, especially those most financially strapped.

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

This trend is encouraging, but only one of several factors that impact sales.

I know many investors have asked about our sales expectations for the second and third quarters.

The comparisons are considerably more difficult.

While certain markets and categories outperformed during last winters, others underperformed.

We believe we should improve in those regions and in our maintenance categories, should the weather patterns be considerably different.

As our history has shown, we manage this Business focusing on both short- and long-term performance.

As we enter the second quarter, we are keenly focused on delivering consistent, strong performance, and extending our streak of 33 consecutive quarters of double-digit EPS growth.

Our operating theme for 2015 is wow every customer, everywhere.

And our key priorities for the year are: 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 last quarter, under the great people providing great service theme, we continued with our intense focus on improving execution.

Along with the improvements to our catalog assortment, we're incorporating more training tools to help our store AutoZoners provide trustworthy advice.

Training will continue to be a large effort for us at the store level.

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 realize, as 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 of our businesses.

In regards to commercial, we opened 61 programs during the quarter.

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

We expect to open approximately 300 programs this year versus 424 last year.

As we continue to improve our product assortments and availability, and as we make other refinements to our offerings, we expect that the sales potential will continue to increase.

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 Q1 at 31.7%.

We are very pleased with this metric, as it is one of the best, if not the best, in all of hard lines 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 we invest is our investors' capital.

Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to recognize our entire Organization for their efforts to manage the 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 the inclusion and upcoming expansion of IMC, we are ready to continue to provide wow customer service to all of 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 is Bill.

Thanks, Bill.

Good morning, everyone.

To start this morning, let me take a few moments to discuss our retail, commercial and international results for the quarter.

For the quarter, total auto parts sales, which includes our domestic, retail, IMC and commercial businesses, our Mexico stores, and our five stores in Brazil, increased 8%.

Regarding macro trends, during the quarter, nationally unleaded gas prices started out at $3.46 a gallon, and ended the quarter at $2.82 a gallon, a $0.64 decrease.

Last year, gas prices decreased $0.31 per gallon during the first quarter, starting at $3.60 and ending at $3.29 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 an 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 2.3% in September; we don't have October and November data 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 location was $1.746 million.

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

For the quarter, commercial sales increased 13%.

Commercial represented 17% of our total sales, and grew $45 million over last year's Q1.

Last year's commercial sales mix percent was also 17%.

This past quarter, we opened 61 new programs, versus 125 programs opened in our first quarter of last fiscal year.

We now have our commercial program in 3,906 stores, supported by 171 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.

As I mentioned, our commercial sales were up 13% this past quarter, a nice acceleration versus last quarter.

While our average sales per program is below some peers in our industry at $8,500 a week, we feel we are on the right track to methodically close that gap.

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.

This year, we are increasingly focused on measuring and growing sales in our older programs, and with specific emphasis on our long-term customer growth.

Looking specifically at our mature programs, those at least five years old, they grew in the high single-digit range this past quarter.

Additionally, we still have significant opportunity to open additional programs over the next several years.

We feel good about the successes we've had in profitably growing the commercial business.

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

We believe the improvements we have made, and upcoming additional improvements from our inventory availability initiatives, enhance our prospects, and we believe the addition of IMC will provide us with additional avenues to service our commercial customers very effectively.

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

Our Mexico stores continue to perform well.

We opened four new stores during the first quarter, and we currently have 406 stores in Mexico.

We expect to open a similar number of stores in Mexico this fiscal year that we opened last year.

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

Now, regarding Brazil, we are currently operating five stores.

While we didn't open any stores this quarter, 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.

Our sales growth has been very encouraging and on plan, but we continue to operate at considerable loss.

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

Once we refine our offerings and operations, and evaluate the performance, we will provide you with an update on our long-term growth plans.

Recapping this past quarter's performance for the Company in total, our sales were $2.260 billion, an increase of 8%.

Domestic same-store sales, or sales for stores open more than one year, were up 4.5% for the quarter.

Gross margin for the quarter was 52.1% of sales, up 20 basis points.

The improvement in gross margin was attributable to higher merchandise margins and lower shrink expense, partially offset by the impact on margin from the IMC acquisition.

In regards to inflation, it has been basically non-existent for a couple of years now.

While certain categories have had some price increases in general, we had slightly more decreases.

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

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

Looking forward, we continue to believe there remains 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 a steady headwind on our overall gross-margin rate for a few years, we've not bothered to call out the headwind quarterly, as it is part of our operating model.

Additionally, until we anniversary the acquisition, IMC will present a headwind on our gross margin of approximately 30 basis points over the next three quarters, 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 33.98% of sales, higher by 45 basis points from last year's first quarter.

The increase in operating expenses as a percentage of sales was primarily due to higher legal costs and self-insured medical costs.

Now, IMC will also have approximately 10 basis points of deleverage on SG&A in the upcoming quarters.

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

EBIT for the quarter was $409 million, up 6.5% over last year's first quarter.

Our EBIT margin was down 25 basis points at 18.1%.

Interest expense for the quarter was $37.1 million, compared with $42.4 million in Q1 a year ago.

Debt outstanding at the end of the quarter was $4.422 billion, or approximately $250 million more than last year's balance of $4.174 billion.

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

While in any given quarter we may increase or decrease our 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 35.9%, down slightly from last year's first quarter.

We expect our annual rate to be closer to 36.7% on an ongoing basis, since the deviation in results this quarter was primarily driven by the resolution of discrete tax items that arose.

Net income for the quarter was $238 million, up 9.3%.

Our diluted share count of 32.8 million was down 5.5% from last year's first quarter.

The combination of these factors drove earnings per share for the quarter to $7.27, up 15.6% over the prior year's first quarter.

Relating to the cash flow statement for the first fiscal quarter, we generated $375 million of operating cash flow.

Net fixed assets were up 8% versus last year.

Capital expenditures for the quarter totaled $92 million, and reflected the additional expenditures required to open 27 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.

With the new stores open, we finished this past quarter with 5,006 stores in 49 states, the District of Columbia and Puerto Rico; 406 stores in Mexico; 17 IMC locations; and 5 stores in Brazil, for a total count of 5,434.

Depreciation totaled $61 million for the quarter, versus last year's first-quarter expense of $56 million.

This is in line with the recent quarter growth rates.

With our excess cash flow, we repurchased $300 million of AutoZone stock in the first quarter.

At the end of the quarter, we had $570 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 112.5%.

The inclusion of IMC reduced the AP ratio approximately 150 basis points.

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 $3.3 billion, up 11% versus the Q1 ending balance last year.

Increased inventory reflects the recent IMC acquisition, new-store growth, and additional investments and coverage.

Inventory per store was up 6.7%, at $604,000 per store, reflecting our continued investments in hard parts coverage and the IMC acquisition.

Increase in inventory per store this quarter from last quarter was predominantly IMC-driven, which added just over $10,000 per store to this metric.

Excluding IMC, inventory was up 9% over last year Q1.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.7%.

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 this morning to report our 33rd consecutive quarter of double-digit EPS growth, growing this quarter at a rate of 15.6%.

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

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

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

As we continue to invest in our businesses, and monitor the results from our ongoing inventory initiatives, we are optimistic about our future.

We feel like we continue to be on the right track.

Again, we are excited about our initiatives around inventory assortment, hub stores, commercial growth, Mexico, ALLDATA, eCommerce, 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 in the 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 quarter, but we must remain committed to delivering on our strategic and financial objectives.

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

Thank you.

(Operator Instructions)

The first question is from Alan Rifkin with Barclays.

Thank you very much and congratulations on a very nice quarter.

First question is for Bill Rhodes.

Bill, with all of the new initiatives that you're presently undertaking, whether it's increasing delivery frequency, investment in the mega hubs or the IMC acquisition, it seems like there's a much greater willingness on your part to possibly take on more risk and grow the business at a greater rate.

Can you provide a little bit of color on why that seems to be at this point in time and is there any one of those programs where you have greater confidence than the others?

Thank you.

It's a terrific question.

I think I would say the pendulum has moved modestly.

I don't want to send a message that we changed our investment profile significantly, but working with our terrific Board of Directors, we've made a decision to take on a little bit more risk and diversify our portfolio a little bit.

You mentioned some of them.

AutoAnything is also another great example of that, which has allowed us much better insights into the online retail market and provided us with another great team and a good solid business.

I think you asked also which one do we think is the biggest and has the most potential.

I would tell you that inventory availability has the most potential because it impacts roughly $8 billion of our revenue today.

IMC and AutoAnything are clearly smaller business and good solid businesses and growth aspects, but the inventory availability initiatives can also significantly impact the overall business.

Also left off that we've been growing in Brazil as well and as we mentioned, it's costing us a significant amount of money in operating losses down there as we try to get that up and going.

But the same kind of thing happened when we were in Mexico initially and now we sit here with over 400 stores and a very solid business model in Mexico.

Okay.

So, Bill, as you continue to target inventory availability and you test different deliverancy frequencies, what are you learning --and obviously it increases your revenues.

I think that's probably clear.

But what are the costs associated with testing those different delivery frequencies and ultimately, do you believe that this can be accretive to EBIT margins as well as accretive to comps and revenues?

It's a terrific question.

I would tell you -- I'll give you some color on it, but the reason we're not saying today, here is what we're going to do, is because we don't know all of those answers yet.

So on delivery frequency for instance, we tested two times a week, we tested three times a week, we tested five times a week.

We don't know what the right answer is yet.

The cost profile of going twice a week is very different than going five times a week.

Similarly with mega hubs, we're finding how far can we go out on a same-day basis versus an overnight basis and the cost profiles are very different.

I would tell you that I would not expect that this initiative would be EBIT margin accretive.

In fact, I would expect it to be dilutive.

I can't tell you today how much it will be dilutive.

I wouldn't expect it to be massively dilutive, but it's hard when you're holding yourself to a 19% roughly annual EBIT margin to say you're going to do new initiatives that are going to meet that.

We do not want to hold ourselves to that standard.

Just one last one, if I may, and then I'll pass it on.

Is it possible that some stores might be better served with two times a week as opposed to three or five?

Can there be some variability in the delivery frequency?

I'm having a lot of difficulty with that word this morning.

It's a difficult word, trust me.

I had to say it many times in the prepared comments.

Delivery frequency.

Yes, I think that's a question that we're asking ourselves right now.

So if we have a distribution center in Dallas, Texas, and we have a $70,000 store in Dallas, going there five times a week seems pretty easy.

But if we have to go to Fargo, North Dakota, does it make sense to go five times a week?

Those are questions that we just haven't answered at this point.

Thank you.

Let me pass it on to somebody else.

Thank you.

The next question is from Robert Higginbotham with SunTrust.

Good morning, everyone.

You mentioned the potential for two to three more DCs and that you expected to put in two to three more DCs to increase your inventory availability.

That seemed to cover a broad range of potential frequencies for deliveries.

What kind of range would that two to three cover?

Would that go up to daily?

Would that be two to three times a week?

How should we think about that?

Well, the most we're testing today is five times.

I wouldn't call it daily, but we would be able to reach the network that we think we need to reach on a two- to five-time a week basis from if we added those three distribution centers.

Okay, fair enough.

Have you talked about what kind of lift you've seen on sales at the stores you've tested two to five times?

No, we haven't yet because we're testing around 150 stores and we're testing these different profiles and, frankly, the results are mixed.

They are all positive, but the range of results are different.

Different markets are performing different ways so we need to get a better handle on it.

That's why we're going to expand the test to further validate our results.

These are big decisions that we will make and we're taking our time to make sure we make the right decisions.

Okay, and one last one on IMC.

Beyond the next 12 months where you said you would add a handful, how do you think about the potential number of warehouses?

Obviously Advance has put out some pretty aggressive numbers out there for Worldpac with IMC being at least a similar concept.

Any reason you couldn't, over time, reach something close to those levels of locations?

As part of that, could you talk about how capital intensive the new IMC warehouse is?

Any numbers you can share on unit economics would be helpful.

Thanks.

Sure, on the number of locations, we think we'll have over 100 at some point in time.

Don't see why anybody else would have more than we do, so that will be our plan over time.

But we're going to open a handful this year.

It's a new business for us, new endeavor for us, and we're going to work with the IMC team to figure out how we can best leverage each other and open up a few, make sure that we get the performance that we want and then we'll accelerate from there.

From a capital perspective, the stores or the locations are typically non-retail and more warehouse locations, so they're typically certainly less than a retail location would cost.

Great, thank you.

Thank you.

The next question is from Dan Wewer with Raymond James.

Thanks.

So, Bill, in expanding the daily delivery or the delivery capabilities of two to five times a week, that would still be less frequent than your three largest competitors in the commercial channel.

What do you think that you would be leaving on the table by not going to maybe a multiple daily delivery rate?

Well, just to clarify, we will be going multiple times a day from our hub stores and our mega hubs in those markets.

And so I don't think we would be -- if we went for five times a week, I don't think we would be at any competitive disadvantage at that point in time.

So the two to five times per week is from the large distribution center and then you'd top off additionally from the hubs and the mega hubs?

Three times a day typically within a reasonable proximity to the store.

So when you look at roughly the 30% gap in revenue per program, do you think this is the game changer that will get you to that $11,000 to $12,000 a week level?

I don't know the answer to that yet, Dan, but what I do know is this will be a material change in our ability to fulfill our customers' needs.

We are seeing significant improvements in sales performance.

My personal expectation is that will grow over time as our commercial customers, in particular, experience us being able to fulfill their needs at a higher level and I think it can make a big difference.

Whether or not that's the silver bullet, I don't think there's a silver bullet.

I think we have got to stick to our [knitting] and continue to improve business every day and get better.

Separate question, on the legal expenses, that appears to be about $0.09 a share after tax.

Is this a one-off issue tied to the lawsuit that was in the papers a few weeks ago or do you think this is going to be an ongoing, higher expense rate tied to the legal environment that you're in?

No, it's more the former.

We don't want to talk about anything in particular, but obviously during the quarter we believe we had a one-time, non-recurring cost and as you pointed out, it was worth about 22 basis points of SG&A for just this quarter.

The final question for Bill Rhodes.

When you think about the benefits of the drop in gasoline prices compared to the headwinds from the favorable weather last year, which wins in that tug of war?

I'm sorry, you faded off at the end, Dan.

Which is going to be the most relevant, the benefit from the drop in gasoline prices or the headwind from the more difficult sales comparisons from the ideal weather last year?

Clearly we had terrific performance last year in the second quarter.

We saw it in specific categories.

The weather-related categories performed exceedingly well.

However, some of the other categories did not perform well and we talked about that last year in the second quarter.

So the weather is going to be what it's going to be.

There's not material changes that we need to make to our business, so we're going to just go out and slug it out the best we can.

On gas prices, they've really dropped precipitously just recently and we think we're beginning to see some of the benefits.

I expect the benefits to be bigger over time if they remain at these levels or even go lower.

But as far as trying to compare the two, I think you have just as good of insights on that as I do.

Great.

Well, thank you and good luck.

Thanks.

Thank you.

The next question is from Aram Rubinson with Wolfe Research.

Hey, good morning.

Thanks for taking the question.

A couple of really good questions already asked.

I want to tie it towards the cash flow, if we can.

I think back in 2012, you reduced your share counts by 9% and the following year by 8% and the following year by 7% and this year we're kind of 5.5%.

So what I'm wondering is, where does that go and implicit in there is where does CapEx need to go to accommodate these investments that you've got on the docket?

That's a good question.

If you look at it over the last several years, we obviously had some benefits on working capital improvement when you look at AP to inventory.

As we've headlined over the last several quarters that we feel great about where we are from an AP to inventory ratio, well over 100%; we think there's some moderate opportunities for us to continue to improve AP to inventory.

But we do not anticipate having the kind of increases in AP to inventory going forward that we experienced over the last several years.

Some of that attributed to helping us from a share repurchase perspective.

I think relative to capital investments in terms of distributions, et cetera, as Bill mentioned, we may add two to three distribution centers over the next several years and we still have work to do to determine when we will do it, how many we will do, et cetera.

But also keep in mind that we would've have added one or two distribution centers over time anyway just to support our footprint across the United States.

You can clearly get out a map and see that we really don't have a lot of distribution capabilities necessarily in the Northwest relative to the amount of stores that we've opened over the last five years.

So some of that is inherent in our model overall.

So we'll give you a little bit more color on the inventory initiative over the next couple of quarters as we finish out the test and have a better plan.

I think from a share repurchase perspective, we think we're in a pretty good position right now and we'll continue to seek opportunities to improve working capital, but I think that's kind of the gap that you've seen over the last several years.

Well, without giving us a number, can you tell us where you might have flex room inside of CapEx if you did decide to step it up on the DC side, what things might be able to come out to accommodate it?

Thank you.

I'm sure there are some things in there, nothing significant that sticks out at the moment.

The one thing for sure that we want to make sure we're doing is looking down the road.

So we're going to continue to make sure that we're making information system investments in order to support our growth long term both domestically and internationally.

We're very diligent about, according to our pledge, making sure that our stores look right and we're going to continue to invest in our maintenance and training of our AutoZoners.

So there will be opportunities for us to tweak the CapEx a little bit, but we will definitely have some cost relative to the distribution centers.

Thanks, Bill.

Thanks, Aram.

Thank you.

The next question is from Michael Lasser with UBS.

Hi.

This is Max [Agree] on for Michael Lasser.

Congrats on the quarter and thanks a lot for taking my question.

How far do you think your current inventory initiatives can take you in closing the commercial sales per program gap with your peers?

I think it's too early for us to tell.

As I mentioned, our performance so far with -- everything is performing well, but there's a pretty wide band of how they are performing.

I also think it's going to take time.

Just because we improve inventory availability, it's going to take us time to further deepen those relationships with our commercial customers.

I think we're doing a lot of great things in our commercial business.

As I mentioned in the prepared remarks, we've grown commercial double digits for five straight quarters.

I think that's pretty impressive and hopefully we can continue to do that.

Thanks a lot.

Also, as a follow-up, can you maybe dimension some of the cannibalization that you're seeing from your younger programs at all?

We can internally.

We don't necessarily discuss it externally.

I think the key to focus on, for this quarter, is that we've obviously improved the productivity of our commercial programs on an average weekly sale basis, which is one of the ways we measure it from 8,500 versus 8,300 last year.

We're seeing high single-digit growth out of our mature programs, so we feel pretty good about the programs as they mature and we recognize that 30% of our overall programs are three years old or younger.

So there will continue to be some cannibalization on those, more from just transferring mature customers around.

But overall we feel pretty good about the growth rates we've achieved on commercial and we feel pretty good about the trend rates that we've seen on commercial.

All right, I appreciate it.

Thanks a lot for taking my question.

Have a good one.

Thanks.

Thank you.

The next question is from Seth Basham with Wedbush Securities.

Good morning, nice quarter guys.

Thank you.

You guys had same-store sales accelerate 240 basis points from 4Q to 1Q.

Could you try to break down the drivers of that acceleration between inventory availability, whether industry growth, et cetera?

One of the things we thought that weather was probably worth around a point or so.

I think from a gas perspective, where lower fuel costs, as Bill mentioned before, a lot of that happened late in the quarter, so I suspect that benefited some.

Ex those items and I think the progression that you saw from comp store sales is really a result of a lot of the initiatives we put in place, when you think back on inventory optimization, the algorithms we changed, adding more inventory into the stores, et cetera.

Now that's baked itself for just about a little over a year now.

We feel pretty good about that.

And as Bill mentioned before, on many of these initiatives it's going to take time for the customers to recognize the changes that we've made.

So that inventory optimization is a great example of one where it took several months and now we believe that we're starting to see some benefits baked into our results.

Got it.

As you look forward, obviously you don't provide guidance, but from the outside in, should we be thinking about consistent two- year stacked comps for the next couple of quarters?

We don't really look at it that way.

We're kind of looking at how are we doing right now, this past quarter and what do we have in front of us.

As Bill mentioned before, clearly this next quarter has a high comp because we had some severe weather and that impacted a lot of failure-related categories in a lot of the Northeast markets.

At the same time, there were a lot of maintenance categories that underperformed and there were markets outside of the Northeast that underperformed.

So we'll have to wait and see how it all shakes out, but we think that there's opportunities from the category in a region perspective and if gas prices stay down, that can only be helpful.

Okay.

And then lastly on deflation, would you expect to see more deflation running through your business with oil prices down, impact on oil and chemicals specifically, as well as products with steel input?

Intellectually a little bit, we would expect to see some deflation, but we haven't seen it yet.

There's been a little bit of deflation on oil; there are other categories that have experienced some inflation.

So on the whole, we've seen relatively benign inflation or deflation in total and we'll have to wait and see how it does shake out.

Right now, we don't really see a big change.

Got it.

Thank you so much.

Thank you.

The next question is from Matthew Fassler with Goldman Sachs.

Thanks a lot.

Good morning.

I want to start out by focusing, if we could, on SG&A.

Even when we isolate out the two discrete items that you called out, healthcare and legal, the growth rate in SG&A looks to have picked up a bit just slightly from where you were earlier in the year.

How should we think about your expense comparisons going forward?

And how much discretionary investment would you say was embedded in the underlying SG&A number here in the November quarter?

Yes, I think that's a good question, Matt.

Obviously we had the legal, we had insurance, you put some IMC cost in there we didn't call out.

Ex those things out, you're probably at a flat SG&A rate year-over-year, but you had a 4.5% comp, so you would expect to have had some leverage on SG&A above that.

I would think that the way to think through that is, we probably had a little bit from a discretionary perspective and not so much discretionary as these inventory initiatives.

Although we haven't quantified them, they are a little bit of a headwind from an operating cost perspective and we would expect those to continue over the next couple of quarters as we continue to test those out, so there are some dollars in there.

I'm not going to quantify exactly what the percentages are, but I think we ran flattish for the quarter, if you will, when you back out some of those items and probably had a little bit of investments on our initiatives.

Just to follow that through a little bit, you've had a track record over the past couple of years of tightening your belts a bit when the business has been tough, as was the case in your FY13, and then investing a bit more when the business has been better.

So because you did that last year, your expense compare looks easy, if you will, just given you had some sizeable increase this year.

We consider then that perhaps the compare might be easy, but the investments should persist into the middle of this year given that the supply chain dynamics or supply chain investments remain very much underway?

Exactly right.

And then a follow-up, I was trying to work with some of the numbers you gave us to understand the intrinsic profitability of IMC today and where it could be headed.

So presuming that it's about a 1.5% of the business pro forma, you talked about a 30-basis-point drag on gross margin and I believe you talked about a 10-basis-point drag going forward on SG&A.

Should that spell out something like a mid single-digit operating margin for that business as we speak?

I would say not as we speak.

I think we think of them as in a growth mode.

They've got some immature businesses; we're going to continue to invest in those businesses, et cetera.

We would need to improve the profitability of IMC.

And then more importantly, we also need to over time help our own commercial customers through IMC product.

I know it's a small business, but given that it's sort of tough to get at a precise number, would you say that business is in the black today, just to get clear on that?

No, to be clear on that, Matt, not to talk around it, it's at a slight loss.

Got it and the profit potential of that model over time as you think about the intrinsic gross margins and term potential, et cetera?

I'd say that's probably closer to what you were thinking before, which is probably a mid single-digit kind of a number, but the bigger opportunity will be the broader base.

Understood.

Thank you so much.

Thank you.

The next question is from Greg Melich with Evercore ISI.

Hi, thanks.

I have a couple follow-ups, I think.

One was on the sequential improvement in the comp trend.

How much of that was -- I heard traffic was still a little bit negative, but how much of that sequential improvement was traffic versus ticket?

I think it was both.

I talked about it earlier.

The ticket front for about the last year or so, it's been really -- we have been continuing to grow, but its been subdued.

That trend changed back to kind of normalized trends this quarter, but traffic also improved.

As we're looking and talking about the acceleration from Q4, I'd also remind us all that nobody was really happy with Q4.

And remember that July was really poor and August was poor as well, so that wasn't necessarily the baseline, if you will.

Okay, great.

Then to understand a little bit more about, I think I heard in the prepared comments that you had lower product acquisition costs.

What's driving that?

And if you think about it going forward, I think you mentioned inflation just isn't back at all.

Do you think there's actually some deflation likely to come in into next year?

Yes, I think our merchandising organization continues to do a great job both in identifying new vendors for existing product where we can reduce our cost in direct import opportunities overseas doing things directly or finding new vendors overseas as well.

So I think the merchandising organization has done a great job from lowering our acquisition costs.

Haven't seen, in total, a lot of deflation necessarily, but we haven't seen inflation either, obviously.

Going forward, right now our expectation is that there won't be much deflation or inflation, but clearly in some categories we expect there will be a little bit of deflation.

I think overall it will be relatively flat.

Remind us, where are you now in terms of direct imports as a percentage?

It's not a significant percent.

It is certainly well below 20%.

Okay, and Duralast, do you have a number for that?

Our family branded products of Valucraft, Duralast, Duralast Gold products, V-Max, represent just over 50% of our overall sales.

Okay, great.

Thanks a lot.

Good luck, guys.

Thank you.

Thank you.

That's all the time we have for questions.

I'd like to turn the call over to Bill Rhodes for final comments.

Yes, before we conclude the call, I'd like to take a moment to reiterate that we have a long and strong heritage of consistent impressive performance.

While we are excited about our growth prospects for the year, we will not take anything for granted as we understand our customers have choices.

We have a solid plain 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.

Thank you for participating in today's call and we would like to wish everyone a very happy and healthy holiday season and a prosperous New Year.

Thank you.

Thank you.

This concludes today's conference.

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