汽車地帶 (AZO) 2015 Q3 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, you may disconnect at this time.

This conference call will discuss AutoZone's third-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, 11:00 AM Eastern Time.

Before Mr. Rhodes begins, the Company has requested 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 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.

I would now like to turn the meeting over to Mr. Bill Rhodes.

Sir, you may begin.

Good morning, and thank you for joining us today for AutoZone's 2015 third-quarter conference call.

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

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

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

Please click on quarterly earnings conference calls to see them.

To begin this morning, I want to thank all AutoZoners for delivering another solid quarter.

Our primary focus this quarter was to continue and expand our different delivery models, open two additional mega hub stores, and closely monitor the performance of these ongoing tests.

We've made good progress on these tests, and now have just over 900 stores receiving increased deliveries intraweek or 18% of our domestic store base, and we now have four mega hubs in operation.

In recent years, we have diversified our portfolio somewhat, with an emphasis on building additional legs of growth for the future.

Our retail domestic business, which generates approximately 70% of our revenues, performed well in Q3, and while our growth slowed modestly from last quarter, we continue to see opportunities for future growth in both store count and same-store sales.

Secondly, our commercial domestic business, which has been growing sales by double digits since 2010 continued its growth in Q3, and continues to represent a significant opportunity for us.

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

In Brazil, we opened two additional locations, and our sales continued to grow nicely.

As with other international companies, the strengthening dollar has negatively impacted our US dollar earnings from these operations recently.

Even with this volatility, we are comfortable continuing to open stores at our current pace.

Our internet businesses, AutoZone.com, and AutoAnything continue to grow well, generally consistent with our expectations.

ALLDATA, which is the leading diagnostic and repair information business in the United States, continues to perform well; however, that business is more mature, and coupled with increased competition has experienced more nominal growth.

And finally, IMC, an imports parts specialist that we acquired last fall, continued with its integration process, where we are working to expand their footprint of branches, and where we are working to leverage their inventory assortment across the AutoZone domestic store base.

This past quarter, our US retail business expanded with the opening of 27 net new stores.

We also opened 72 net new commercial programs.

We have a commercial program in 79% of our domestic stores, having opened approximately 750 new programs in just the past two years.

Additionally, we opened seven stores in Mexico during the quarter.

In Brazil we opened two additional stores, and operated seven stores at the end of the quarter.

We expect to open a couple of additional stores over the next few months.

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

We believe we have growth opportunities on a variety of fronts in the US and outside the US, for many years to come.

The cadence of sales this quarter showed much weaker performance at the beginning of the quarter, offset by stronger performance during the last two reporting periods.

These results were not unexpected to us.

If you recall during our conference call last quarter, we discussed how income tax refunds were issued earlier this year, following in the last two weeks of the second quarter.

We believe approximately 100 basis points of same-store sales were pulled forward, which benefited our 3.6% reported comp last quarter.

After the tax refund cadence normalized, our sales results improved, as expected.

Regarding merchandise categories, our failure categories continued to do well, outpacing both maintenance and discretionary categories.

This was opposite of last quarter, and a little unique, considering we were hoping the lower gas prices at the pump, coupled with the Spring season would lead to accelerating growth.

Our belief is that the late winter storms in the first few weeks of the quarter, coupled with accelerated tax refunds, led to a later start to the Spring maintenance season.

Regarding regional performance, the West and the East did a little better than the central part of the country.

Much of this can be attributed to the precipitation we experienced in these areas.

We felt we finished the quarter in good shape to start our Summer selling season with our stores looking great, and our inventory assortment better than it's ever been.

I should say one last thing regarding the income tax refund discussion mentioned earlier.

From reports issued by the Treasury Department, the amount of refund dollars were just about identical with last year's totals; however, it was the pronounced shift to initiating the refunds two weeks earlier this year that was new.

We believe this was a large reason for the start of our quarter being a little weaker, and we believe our last quarter sales represented more normalized levels.

Overall, we were pleased with our sales performance in Q3, and we are optimistic about the sales environment heading into our fourth quarter.

Inventory levels increased over last year's Q3, approximately 6% on a per location basis.

This was in line with our expectations, as we have implemented several tactics over the past year to improve our hard parts coverage, and to place inventory closer to our customers.

We anticipate that inventory levels will remain relatively flat in Q4.

Additionally, the IMC acquisition has increased our inventory per store across the chain by about $13,000.

IMC branches carry approximately 10 times the inventory per location that an average AutoZone store carries, but their sales volumes on a per location basis are materially higher, as well.

As we've discussed on the last several quarterly calls, we have several initiatives to improve our inventory coverage and our ability to say yes to our customers, both retail and commercial, more frequently.

We are continuing to expand our initiative around replenishing stores on a more frequent basis from our distribution centers.

Traditionally, the vast majority of our stores were replenished once per week.

At the end of the quarter, we had more than 500 stores that were being replenished between three and five times a week, the majority of which began in Q3.

Based on our results to date, and to provide us with additional data to determine our long term strategy, we added more than 350 additional stores to this program in just the last few weeks.

This brings our total store count of stores receiving additional deliveries per week to well over 900 stores.

We are seeing a lift in sales; however, we have yet to definitively determine the ultimate benefit, nor have we determined the optimal frequency.

So consistent with past tests, and given the magnitude of change, we will methodically test and carefully measure our results.

In order to replenish our stores on a more frequent basis, it will require increased operating expenses and capital expenditures, primarily for two to three additional distribution centers.

Our modeling to date, based on current results, indicates that while it is dilutive to gross and operating margins, it is sufficiently additive to operating profit dollars over the long term.

We've been pleased with our learnings to date, and are encouraged to continue to expand more stores on to the program to better evaluate our results.

Additionally, I want to update you on our mega hub stores.

As a reminder, our stores are supported by approximately 173 hub stores with an expanded assortment.

While a traditional hub store carries between 35,000 and 50,000 SKUs, our mega hubs typically more than double the hub store SKU assortment.

With these substantially expanded product assortments, our mega hubs leverage those increased product assortments across other hub networks, providing stores across a very large geography access to this broad assortment.

Along with the two older locations, we opened two additional mega hubs this past quarter.

We are planning on opening one additional mega hub location in the fourth quarter.

Based on our results to date, we have begun to identify the next set of mega hub locations, and are in various stages of developing these stores.

Assuming our findings are confirmed by the more recent mega hub openings, we will develop a long term strategy to roll out these mega hubs to provide service to the majority of our domestic stores.

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

As our commercial business has grown, and as our aspirations for this business are quite high and our DIY customers' needs increase, our need for expanded assortments of quality products at the right price continues.

This has been important and difficult work.

I want to stress we are still learning, but we are encouraged by these initiatives.

Before moving more aggressively, we need to have solid evidence of the long term ramifications to our business, and we need to ensure these initiatives are the appropriate course of action.

At this point, we are encouraged with our findings, but there are examples of inconsistent performance between markets and initiatives and we need more time and more test results to determine our ultimate strategy.

Lastly, around our inventory initiatives, we are in the early stages of expanding our direct import capabilities.

Although we currently have an active program, we believe that it can be significantly expanded by developing more internal capabilities.

We have completed significant research, and have now developed a new global sourcing strategy, and that strategy, which includes us opening our first offshore sourcing office, is in the implementation phase.

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

IMC is the second-largest distributor of OE quality import replacement parts in the United States.

They specialize in parts coverage for European and Asian cars.

While considerably smaller than the number-one participant in the industry, IMC, now with 18 branches, offers an impressive growth opportunity for us, not just because of the parts coverage, but also because of the strong management team.

While it's still early in the process, 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 we expect to open several new IMC locations over the next 12 months.

We acquired IMC in September, and the rate of integration and expansion has been encouraging to date.

Thus far, we've made the IMC catalog available to over 500 AutoZone locations.

While many of these 500 recently added the ordering capabilities from IMC, we have seen a sales lift in these stores' commercial sales programs that encourages us that our assumptions on the sales lift to AutoZone from cross-selling were correct, if not even conservative.

Additionally, IMC added one new branch and several others are in the development pipeline.

Finally, we relocated the IMC East Coast distribution center, which allows greater access to more sizeable markets.

Let me stress, the IMC brand is very important to us.

We will grow the brand and its presence in the future in many more markets than it is in today.

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

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

We are very excited to have the great IMC team as part of our organization, and we are very optimistic about our future together.

We continue to see synergies moving forward.

Now, let's turn to our third-quarter overall results.

Our sales increased 6.5%, and our domestic same-store sales were up 2.3%.

Both retail and commercial experienced positive same-store sales growth.

While our same-store sales were negative the first few weeks of the quarter, due in our belief, mainly to a shift in the income tax refunds, the remaining weeks improved.

That consistency was across all regions of the country.

We believe we continue to benefit from macro tailwinds, our work on inventory availability initiatives, and solid execution.

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

In line with weekly sales performance, our traffic accelerated at the end of the quarter versus the beginning.

Our average ticket grew generally consistent with the first and second quarters, when it 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.

While improvements in product quality have pressured traffic over the last couple of decades, the technology advancements 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.

We opened 72 new commercial programs in the quarter, versus 137 programs in the comparable period last year.

We now have the commercial program in 79% of our domestic store base.

Our commercial sales, excluding IMC, were up 11.4% this quarter.

While our productivity per program was nicely positive, it did not increase as much as last quarter.

Much like our retail business, our commercial business did slow in the first few weeks of the quarter, but finished more in line with our expectations.

We have intensified our focus on mature program growth, and to specifically mature customer growth, and it was encouraging to see the improvements that began in Q1 and Q2 continue into Q3, although those improvements were muted in the first few weeks of the quarter, as well.

Finally, our older programs, those greater than five years old, continued to grow in the mid single digit range.

Regarding Mexico, we opened seven stores this quarter, and we added two stores in Brazil.

Sales in our other businesses for the quarter were up 6.5% over last year's third quarter.

As a reminder, ALLDATA and eCommerce, which includes AutoZone.com and AutoAnything, make up this segment of sales.

Regarding online sales, 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, at just 4% of our total sales mix on the quarter, we are seeing these businesses grow at a faster rate than our brick and mortar businesses.

With the continuing aging of the car population, and with gas prices on average down materially year-over-year for the third quarter, miles driven increased 3.9% year-to-date through February.

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

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

This trend is encouraging, but we understand this is just one of many factors that impact our Business.

While gas prices have increased more recently, prices are still around $1 a gallon below last year.

Our operating theme for 2015 is wow every customer, everywhere, and our key priorities for the year are: great people providing great service, profitably growing our commercial business, leveraging the internet, leveraging technology to improve the customer experience while optimizing efficiencies, and finally, 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 improvements to our product assortment, we are incorporating more product content and information to help our store AutoZoners provide trustworthy advice.

Delivering product quality, features and benefits content through training and in Z-net continues to be a major effort for us at the store level.

Behind the scenes, we continued to increase our technology investments, and challenge 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 supports all the ways they desire to connect with us.

It is imperative we continue to invest in both current and future technologies, in order to drive sales growth across all of our businesses.

Over time, we will update you on the rollout of these technologies and how they help us interact with our customers and their vehicles more effectively.

As our competition continues to innovate, we understand our ability to both maintain and gain market share will require us to have great looking stores, higher in stock levels, and most importantly, more knowledgeable AutoZoners, to help customers than even what is available today.

While we are gaining share, we need to be even better.

The biggest link to all of this is our people.

As you have to have the right merchandise at the right price in great looking convenient stores, real differentiation comes from our AutoZoners meeting and exceeding our customers' wants, needs and desires.

Our AutoZoners are the most valuable asset we have in differentiating us in the eyes of our customers.

In regards to commercial, we opened 72 programs during the quarter, and 162 year-to-date.

As we expect to open approximately 300 programs this year versus 424 last year, we will have a busy fourth quarter.

We are on track thus far.

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

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

We should also highlight another strong performance and return on invested capital.

As we were able to finish Q3 at 31.1%, we are very pleased with this metric, as it is one of the best, if not the best in all of hardlines retailing; 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 and thank every AutoZoner for this past quarter's effort to provide wow customer service to all of our customers.

Here is 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, total auto parts sales, which includes our domestic retail and commercial businesses, IMC, our Mexico stores, and our seven stores in Brazil, increased 6.5%.

Regarding macro trends during the quarter, nationally unleaded gas prices started out at $2.27 a gallon, and ended the quarter at $2.69 a gallon, a $0.42 increase.

Last year, gas prices increased $0.29 per gallon during the quarter, starting at $3.38 and ending at $3.67 a gallon.

We continue to believe gas prices have a real impact on our customer's 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 ten years old, the current average, is much different than on newer cars, in terms of wear and tear.

Miles driven increased 4.9% in January and 2.8% in February.

We don't have March or April 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 AutoZone store were $1.761 million.

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

For the quarter, total commercial sales increased 11.4%.

Commercial represented 18% of our total sales compared to 17% last year, and grew $46 million over last year's Q3, and almost identical dollar growth to last quarter's $47 million improvement.

We opened 72 new programs during the quarter, versus 137 programs opened in our third quarter of last fiscal year.

We now have our commercial program in 4,007 stores, supported by 173 hub stores.

Approximately 1,100 of our programs are three years old or younger.

As Bill had mentioned earlier, both our total commercial sales and sales per program accelerated from the previous quarter's results.

While productivity per program is lower than several of our peers, we have a much younger program base.

Being able to increase sales approximately $50 million for the quarter year-over-year is allowing us to close that sales gap.

Our focus is on growing market share and improving our service levels, by having more programs closer to our customers, and we are consistently making progress.

Looking specifically at mature programs, those at least five years old, they grew in the mid single digit range this past quarter, slightly slower than last quarter; however, the first few weeks of the quarter for commercial were muting our productivity growth.

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

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 more 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 continued to perform well.

We opened seven new stores during the third quarter.

We currently have 418 stores in Mexico.

As the US dollar strengthened this past quarter, we did have an FX conversion headwind; however, we still delivered a solid US dollar equivalent EBIT result and felt good about being able to handle the currency weakening in regard to the overall impact of the Company's results.

We expect to open a similar number of stores in Mexico this fiscal year that we opened last year, about 40.

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

Regarding Brazil, we opened two new stores, and now have seven total locations.

We are committed to our prudent pace of development, customers are embracing our offering, and sales results continue to climb.

While still not profitable, we are beginning to close the gap.

While it is easy to envision several hundred stores in Brazil over time, currently our strategy is to open a few more stores over the next several months, and then refine our offerings and prove that our concept works for our customers, and is financially viable.

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 $2.493 billion, an increase of 6.5%.

Domestic same-store sales, or sales per stores open more than one year, were up 2.3% for the quarter.

Gross margin for the quarter was 52.3% of sales, up 29 basis points.

The improvement in gross margin was attributable to higher merchandise margins, partially offset by the impact from Interamerican Motor Corporation, which was acquired during September of 2014.

Looking forward, we continue to believe there remains opportunity for merchandise gross margin expansion within both the retail and commercial businesses.

The pressure we will experience from the IMC business, along with a rollout of further stores on more frequent deliveries from our distribution centers, will continue to cause headwinds to overall gross margin rate.

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

SG&A for the quarter was 31.64% of sales, 12 basis points higher than last year's third quarter.

The increase in operating expenses as a percentage of sales was primarily due to the impact from the IMC acquisition.

While we have invested in several key initiatives that are customer service related, like training and systems upgrades, we believe we are well-positioned to manage our cost structure in response to our sales environment.

EBIT for the quarter was $514 million, up 7.3% over last year's third quarter.

Our EBIT margin was up 16 basis points, at 20.6%.

Interest expense for the quarter was $31.8 million, compared with $36.2 million in Q3 a year ago.

Debt outstanding at the end of the quarter was $4.533 billion, or approximately $160 million more than last year's balance of $4.378 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% above last year's third quarter.

We expect our annual rate to be closer to 36.5% on an ongoing basis.

Net income for the quarter was $309 million, up 8.4%.

Our diluted share count of 32.3 million was down 4.2% from last year's third quarter.

The combination of these factors drove earnings per share for the quarter to $9.57, up 13.1% over the prior year's third quarter.

Relating to the cash flow statement for the third fiscal quarter, our operating cash flow was $523 million.

Net fixed assets were up 7.3% versus last year.

Capital expenditures for the quarter totaled $107 million, and reflected the additional expenditures required to open 37 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 opened, we finished this past quarter with 5,069 stores in 49 states, the District of Columbia and Puerto Rico, 418 stores in Mexico, 18 IMC branches and seven stores in Brazil, for a total location count of 5,512.

Depreciation totaled $62.3 million for the quarter versus last year's third-quarter expense of $58 million.

This is in line with recent quarter growth rates.

With our excess cash flow, we repurchased $515 million of AutoZone stock in the third quarter.

At the end of the quarter, we had $778 million remaining under our share buyback authorization, and our leverage metric was 2.5 times.

Again, I want to stress we managed 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 110.9%.

The inclusion of IMC reduced the AP ratio by about 174 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 $3.5 billion, up 10.7% versus Q3 ending balance last year.

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

Inventory per store was up 6% at $629,000 per location, reflecting our continued investment in hard parts coverage, and the IMC acquisition.

The increase in inventory per store this quarter due to the IMC acquisition was $12,700 per store.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in a return on invested capital for the trailing four quarters of 31.1%.

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 35th consecutive quarter of double digit EPS growth, growing this quarter at a rate of 13.1%.

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.

We will continue to invest in our businesses and monitor the results from our ongoing inventory initiatives.

As we have tested multiple delivery frequency models, financial results have been inconclusive as to which format makes the most sense.

There are incremental costs to more frequent deliveries, and we have to make sure we develop the appropriate long term solution, because many of these additional costs will virtually become fixed costs.

We are moving forward with our mega hub store concept.

As you can see, we've got lots of exciting things going on.

Along with our inventory assortment, our initiatives around commercial growth, Mexico, ALLDATA, eCommerce, Brazil, and now IMC are all just getting started.

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 term.

We believe our steady, consistent strategy is correct.

It's 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.

Our first question is from Seth Basham with Wedbush Securities.

My first question is around your mega hub strategy.

It seems like you've developed more confidence in rolling out that strategy.

Can you give us some more color on the kind of lift you're seeing from mega hubs?

Yes, first of all Seth thank you for the question.

I want to be careful about giving out too much specific information, because we have two stores that have been on the program for a considerable amount of time.

We just rolled the other two locations in the last eight weeks or so.

I will tell you that those two locations are performing at or above our expectations so far, so they are helping us build our confidence level, but I don't want to get into specific sales performance indicators, because there is some variability between them, and there's two of them that are just so new.

But what I will tell you is we do have a higher degree of confidence in that.

That's why we are going forward with looking for additional sites, and we are certainly meeting or exceeding our financial expectations, which means it's meeting our internal rate of return or better.

Got you, good to hear.

And then secondly, as it relates to IMC, you talked about the sales there meeting or exceeding expectations thus far.

What kind of assumptions do you have there for your cross selling list, and do you expect to maintain that type of cross selling list as you expand that to more stores that are further from the IMC branches?

It's going to be interesting over time, and we're very early in this as well.

We started with 8 stores on the program, and we are now be up to over 500, but many of those stores are very early in the process.

I think what we're learning so far is the stores that are very close to IMC locations are going to outperform those that are farther away, and there's certainly a big amount of our stores, call it half of them, that can be touched by an IMC location today, but there's a bunch of them that would have to be serviced overnight.

So it's really early, but we did have assumptions in our overall model and so far we're meeting or exceeding those assumptions, but we've got a long way to go.

Got you, thanks and good luck.

Thank you.

Our next question is from Dan Wewer with Raymond James.

Thanks, good morning, Bill.

You talked about the variability and the results from the new initiatives.

Does that reflect different levels of execution, or is that just the inherent variability that AutoZone sees in a lot of its different businesses?

That's a terrific question, Dan.

I would say that it's not about execution.

I've got to tell you, what our team has done to roll out over 900 stores on multiple deliveries per week, in really over -- just over two quarters, is pretty remarkable.

I guess there's 700 of them just over the last couple quarters, is really remarkable.

And while we're still learning how to do it better, they've almost flawlessly executed that, so hats off to all of the team that's worked on that.

One of the problems we have with this initiative is that we have elected to do many of the tests very close to the specific distribution centers.

It's easier, it's cheaper, a lot of other reasons.

But because of that, we have very small geographies where those tests are focused on, and some of the geographies are going through different things in the marketplace that have nothing to do with delivery frequency, so we're seeing very different results in certain markets, so that's why we keep expanding the test, to try to broaden that swath, so we can make sure we understand what the benefits of that are.

Okay, and then just as a follow-up question, when you think about the benefits from the better parts coverage, do you think you're getting a bigger benefit from the multiple shipments per week from the distribution centers?

I think those are focusing on the faster turning SKUs, or do you think you're going to get a bigger lift from the slower turning SKUs that you're adding to the mega hubs?

Yes, I would say we definitely get a bigger lift from the frequency of delivery test, which is focused on the SKUs that are in those local stores that are sorted there and making sure we have the right replenishment levels.

However, the costs of that initiative are materially higher than they are on the mega hubs.

Okay, so bigger sales lift, but also higher expenses?

Yes, much higher expenses.

Great, thank you.

Thank you.

Our next question is from John Lawrence with Stephens Inc.

Would you comment a little bit about the global sourcing strategy?

I know it's very early, but give us a sense of the context of that process, of using that type of strategy globally?

Thanks, John.

We obviously today import a fair amount of product directly ourselves today, and we have third parties in order to help us do that, and we will continue to do so.

But what we really want to do is to be able to put ourselves in a position to increase that fairly significant over the next several years.

So as Bill highlighted in his comments, our expectation is that we will put AutoZone resources overseas in a dedicated office, that will allow us to be closer to the vendors and the manufacturers, so that we can source with a broader net and improve our quality control, et cetera.

So there's a lot of opportunities there, on a long term basis.

Great, thanks, good luck.

Our next question is from Simeon Gutman with Morgan Stanley.

Good morning.

So a follow-up question on the mega hub, and then how it relates to, or how it fits into the puzzle of multiple delivery.

Are you expanding them, meaning testing them so that the DC may not necessarily be the primary vehicle that's used for multiple delivery, and does the number of mega hubs mean that you won't have to use the DC as much?

Let me go into a little more depth, to make sure we are articulating it appropriately.

So think about a standard AutoZone store that carries 20,000, 22,000 SKUs.

When those SKUs are replenished, that replenishment today comes from the distribution center, and tomorrow if our tests prove successful, will still come from the distribution center but will come three or five times a week.

When the SKU is not in that 22,000 SKU assortment, today the AutoZoners in that store can go for that expanded assortment to a hub store, which will take the 22,000 SKUs up to 35,000 to 50,000 SKUs.

Tomorrow, if the mega hub continues to work, it's that hub store doesn't have it, they can reach out for another 30,000, 40,000 SKUs for the mega hub store.

So the increased frequency of delivery is all about replenishment, and the mega hub is all about increased access to additional parts coverage.

Does that make sense?

Yes, that's helpful.

So my follow-up is, you have you have, as of today over 900 stores that are benefiting from some type of daily delivery.

What's the time frame, your best guess as to how long some of your tests will keep running?

And once you arrive at some formula, whether it's you decide certain stores will be two, three, five days or even once a week, what -- will you turn this on all at once, or what would hold you back from, once you figure out the formula, from turning on the rest of the chain all at once?

It's a fantastic question, which means I wish I could answer it, and I can't.

I would have thought we would have made this decision by now, and would have articulated it to you.

But some of our results have been inconclusive and there's a lot of moving pieces here, and as we said in our prepared comments this is a big decision, and we at AutoZone are pretty methodical in how we make decisions.

This isn't about next year, or the year after.

This is about the long term, and so we want to make sure we get it right.

So we're going to take enough time to get it right, and then as far as rollouts, we've been pretty aggressive the last two quarters by rolling 350, 400 stores on to this program.

I don't know that we could go a lot faster than that.

We might be able to, as we get deeper into it, but it's not something that we would be able to roll out all at once, nor is it something we need to rollout all at once.

I think, you look at the way we've done things in the past, whether that was the commercial new model that we rolled out or the hub store initiative that we rolled out, we like to get in the cadence, do it where it's digestible, and where we can execute it at a very high level.

So I suspect that's how we would roll it out.

Okay, thanks.

Thank you.

Our next question is from Bret Jordan from BB&T.

A question on the global sourcing, and I guess as you look at it, is this going to increase your penetration with the Duralast mix?

And I guess what does it do to supply chain?

Does it add inventory because you own inventory further into the supply chain?

And I guess is the strategy to pick up better pricing, or is it to have better management of product quality?

I think probably better opportunity to source from a broader selection of manufacturers and vendors.

It will have the opportunity to reduce pricing because we'll be able to go direct in many circumstances.

It likely will add a little bit of inventory, just from the standpoint that you'll own it for a longer period of time in the process, but we believe obviously, that the savings that we will achieve from the acquisition costs will far outweigh those carrying costs.

And then from a quality perspective, it probably has some opportunity to improve the quality, though we feel really good about the quality of our product today that we import, so there's a little bit of opportunity there, but probably not as much.

The real focus is going to be on the acquisition costs, getting closer to the vendors and manufacturers, and improving the profitability of the Company.

Will Duralast, as a percentage of the inventory, increase in this process, or is it largely stable or just better sourcing?

I would say that if Duralast increases as a percent of our total, it wouldn't be as a result of this initiative, necessarily.

It's more about sourcing.

Okay and then one quick question on the eCommerce, you said it was growing faster than brick and mortar.

Is that traffic-driven increases, or is that ticket driven increases?

Are you seeing price pressures out there from people like RockAuto, or is the market pretty stable?

The market has been somewhat stable from an online, although it does continue to be somewhat promotional in nature.

From our vantage point, it's really mostly traffic, and so our traffic has continued to grow at double digit rates.

So we've experienced good traffic, and it's a great source of information for our end customers.

Okay, thank you, appreciate it.

Our next question is from Aram Rubinson with Wolfe Research.

Two questions.

The first one, just about the capital structure.

Shares outstanding fell by 4.2% on a year-over-year basis, the lowest that I've seen, at least in our model.

Can you talk to us a little bit about the CapEx element that might be pressuring that?

CapEx is higher as a percent of sales, but talk a little bit about where you think that might max out?

And also whether or not it's making you think about things differently on the rent to own calculation, where you're building out some new stores?

Thanks.

Just if you don't mind me going backwards, it doesn't necessarily change our mind relative from a rent perspective.

We obviously are going to continue to prefer to own where we have those opportunities, because we want to be in control of the asset, and we think it's a cheaper long term.

I would say from the 4% element, it is a little bit lower, but you've seen it come down a little bit over time.

Some of that is stock price driven, and so the cash flow generation that we have has been relatively consistent and stock price has gone up along with the P/E, so it's had a little bit of a natural dilution effect, if you will, from that perspective.

But from a CapEx perspective, there continues to be a little bit of an increase in CapEx.

We had mentioned in previous calls that it's likely that we would do an additional distribution center or two over the next couple of years, so that will have some additional usage of CapEx, certainly not in the numbers today.

Then AP to inventory ratio, which has been a big benefit for us over the past several years, has begun to moderate a little bit more.

And so, as we have said before, that our expectation is that our AP to inventory ratio will probably stay in close to its current rate or a little better, but it won't have the significant increases that it experienced two or three years ago.

Does that help?

Yes, thanks.

And just to follow-up the second question on the commercial arena, you've given us statistics in terms of commercial penetration and growth.

Can you give us more subjective elements, in terms of whether you've got customer service scores or retention rates, or anything internally that you can help us get a sense that you're qualitatively gaining traction there would be great.

One of the things we talked about, probably more extensively on last call, was at the beginning of this fiscal year, we made a shift.

We've been opening a tremendous amount of stores over the last three or four years on the commercial program, and with that, our sales with our mature programs, and specifically our mature customers, were not performing as well as we would have liked.

So beginning September 1, we really reanchored our focus on those mature stores and mature customers, and we have turned the tide, I would say marginally at this point in time, but more encouragingly than we would have thought.

We still have a ways to go, but I think that is one of the key metrics that's on the forefront of what we're looking at.

More subjectively, I would just say, you think back seven or eight years ago when we went to this new commercial strategy, our receptivity in the marketplace is just vastly different, from people that we try to hire to customers that we go in and make sales calls.

Think back eight years ago, we didn't have a sales force out telling our story.

Now we have a very robust and talented and well-trained sales force out there telling our story, and its making a meaningful difference in the marketplace on their receptivity to us.

And is it fair to say that lift in sales that you're getting from the hubs and the mega hubs, is that all attributable to the commercial side of the house?

No, not at all.

Not at all.

It's probably slightly skewed to commercial, but it's also very robust on the retail side.

Thanks so much, have a good day.

Thanks, you too.

Our next question is from Matthew Fassler with Goldman Sachs.

I'll ask another question on global sourcing, and then a quick follow-up.

Can you help us get a sense of the relative profitability of branded goods versus private label goods as they're currently sourced, versus where you think having your own sourcing infrastructure overseas will take you?

It's a good question, and my expectation is that the further we penetrate into global sourcing, the narrower those numbers will get.

But I suspect a few hundred basis points when you take everything into consideration, but you do have some additional costs, as we mentioned earlier, relative to owning the inventory for a longer period of time, and frankly owning it end-to-end.

So there are some offsets, but I would say that's probably a round number to use.

If you think you're starting essentially at zero, how much penetration do you think you could ultimately achieve with your own sourcing infrastructure, and to some degree, would simply having that infrastructure in place would be a good bargaining or negotiating tool for you -- to work with your cost, with your current vendors?

I think the way to think about it is that we've started this journey a long time ago, and we do a fair amount of direct importing today.

And so it's not that we are starting from ground zero necessarily.

The merchandising team has been working on this for a long time, and quite frankly, today, have done a great job of having a fair amount of direct importing.

However, we think we can probably more than double what we're doing today, and probably a little better than that over the next three to five years.

So we're in the third or fourth inning, and working our way through.

My follow-up is on gas prices, and Bill Rhodes, you talked to the way, the impact of gas played out, at a very high level versus expectations.

I know it's hard to attribute sales to individual sources, but if you think about, A, the discretionary products that would sell when people have more money in their pockets, and B, the kind of products that ultimately get sold more of due to miles driven going up, whether it's in chemicals perhaps or I guess wear and tear will take awhile.

Since gas prices have come down, if you could not just restrict it to this past quarter but the past seven or eight months, can you talk about that journey, and how, if at all you think you've seen that impact to business?

Yes, I think we've called it out in the last two specific discussions, that we thought it was a net benefit.

It's not 5%, benefit, but it's in the 1% kind of range.

This quarter, we didn't spend as much time on it, although I think it's beneficial.

With the slight increase, it's probably not as beneficial as it was the last quarter.

The real story this quarter was all about our first period, the first four weeks of the quarter, which were really, really tough.

We expected them to be tough, because of the 100 basis points that we mentioned last quarter we pulled forward, but then those late winter storms, particularly in the deep South, just really muted our growth.

Actually we were down pretty significantly, so that was a story of the quarter, so the one we wanted to focus on in our remarks.

So the weather an additional factor above and beyond the tax issues, that perhaps was unanticipated?

I would say, in those first few weeks, Matt, weather is always seasonal in the spring time, but it was the third quarter here, and we were sitting with six inches of snow in Memphis, Tennessee and that's not normal.

Understood, thank you so much.

Thank you, Matt.

Our next question is from Michael Lasser with UBS.

Bill, I was hoping you could size the potential opportunity from both the mega hub store rollout as well as increasing the frequency of replenishment.

So of that 22,000 SKUs that will see a benefit from the mega hub, are you missing out like 10% of the time, or is it more like 20%?

And then how would you size the increase in frequency of replenishment, as well?

I think it's difficult for us right now to continue to size it.

We're doing close to $1.8 million per store on an annual basis.

These are not going to make that $2.5 million, we could maybe pick up a $1,000, $1,500 per store per week over time that these initiatives work.

But let's also remember the competitive landscape is not a stagnant place either.

People, this whole industry is chasing parts coverage, parts availability, and the ability to say yes, because our customers need it.

As parts proliferation continues, it's become a greater and greater challenge and frankly, is one of the -- is on the forefront of one of the ways we compete against each other.

I don't know that we can sit here and say here is what the number is going to be, because the landscape is going to change over time.

Does the sales increase all come from being able to say yes more often, or is there some element where the parts pros, the folks in the stores feel a little bit more comfortable with what's available, and then they can go out and sell the capabilities to the commercial relationships more aggressively?

Yes, you're talking about really a halo effect there, and clearly, the confidence of our sales team on the commercial side of our counter folks on the DIY side, that's certainly an element.

But I would say the bigger element of it is, if a customer, specifically a commercial customer who's calling you six or seven times a day, if they see a noticeable increase in the amount of times that you say yes, you're going to pick up more share with them.

Conversely, if you are saying no more than your competitor set, then you're going to be challenged.

So I think there certainly are halo effects.

That's hard to see in the data, and hard to estimate over what time that's going to happen, but we certainly think that there's an issue or a benefit there.

The last question on this line is what's the downside.

Can a store become overwhelmed with too much inventory, or does the complexity become a little greater when there's more availability?

Thank you so much.

I think the downside is, what does it cost to get that last sale?

There is a law of diminishing returns on putting inventory into locations.

Why don't we put 50,000 SKUs into a local store?

Well, because we can't afford to.

That's why we have a hub store that will aggregate the demand to 30 or 40 stores.

Same kind of issue with delivery frequency.

There is a law of diminishing returns, how much can you afford to get that last sale.

Okay, thank you so much.

All right, thank you.

All right, before we conclude the call, I hope you had a nice Memorial Day weekend, and I look forward to updating you on our activities from this Summer.

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

Our competition is not standing still, and we must continue to challenge ourselves to improve.

We have a solid plan to succeed this fiscal year, but I want to stress, this is a marathon, not a sprint.

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

Thank you for participating in today's call, and have a great week.

Thank you for participating in today's conference.

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