汽車地帶 (AZO) 2015 Q4 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

(Operator Instructions)

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

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

The conference call will end promptly at 10:00 AM Central time, 11:00 AM Eastern time.

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

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

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

These are based on assumptions and assessments made by our Management in light of experience 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 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 will now hand the call over to Mr. Bill Rhodes, the Company's Chairman, President, and CEO.

Sir?

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

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

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

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

Please click on quarterly earnings conference calls to see them.

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

2015 was a very busy and productive year for us.

We continued to grow our business on a variety of fronts.

Our US retail business expanded again in 2015 with the opening of another 157 net new stores.

Our commercial business continues to gain traction, growing sales 12.9% for the year, with 296 net new programs open.

We now have the commercial program in 81% of our domestic stores, having opened 720 new programs in just the past two years.

And we continue to expand our presence in Mexico, where this quarter we celebrated the opening of our 441st store.

While opening no additional stores in Brazil this quarter, we opened two for the year and now have seven stores in operation.

Lastly we opened three new IMC branches for the year.

We have a lot of runway to open future IMC locations.

We currently have approximately 90% of our total Company sales coming from our domestic AutoZone stores.

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

In 2015 we expanded our online offerings in both our traditional AutoZone.com and AutoZonepro.com websites as well as AutoAnything.

ALLDATA also continued its expansion into Europe.

Along with these strategic investments we've spent a lot of time on initiatives to drive our core domestic retail business.

DIY remains our number one priority.

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

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

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

Over the past two years we implemented new methodologies to improve our hard parts placement techniques in all stores.

We've been testing more frequent deliveries to our stores and expanded parts availability in the mega hub stores.

Additionally we have developed a new store prototype that significantly expands the hard part holding capacity in our stores.

All new stores are now opening with this new prototype, and we remodeled 93 of our most constrained stores.

These efforts have resulted in an increase in our store inventory levels.

They have also added incremental costs.

But sales have justified our investments and offered convincing proof that we've been on the right track.

Along with improving our local parts availability and assortment, we continued to manage this organization to provide exceptional service for our customers, provide AutoZoners with a great place to work with opportunities for advancement, and ensure we do it on a profitable basis to provide strong returns for our shareholders.

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

All week and again during my address to the team at the conclusion of the event, we are rededicating ourselves to Live the Pledge.

Our pledge starts with always putting customers first, and therefore we are always looking for ways to improve our model.

As our product assortment continues to improve, we feel it is essential to reinstill a passion to say yes, we've got it to our customers' needs.

To this day it surprises me how often we have to say, sorry, we don't have that available.

Even with our new part additions too many customers leave our stores without their needs being met.

In this spirit to help the customer we continue to make significant systems enhancements to capture data about our customer shopping patterns across all of our platforms.

We understand we have to be able to share information and process seamlessly between our customers -- between our stores, commercial shops, phone, and online experiences in order to meet all of our customers' needs.

Before getting into specifics on the fourth quarter, I'd like to take a moment to go into detail on our inventory availability test.

We have concluded our test and determined the framework of our new supply chain strategy.

Over the last couple of years we have been testing two specific new concepts: increase frequency of delivery to our stores and significantly expanded parts assortments in select stores we call mega-hubs.

As both of these concepts are a material departure from our long-standing successful strategies, and both of them increase our fixed cost structure, we've been patient.

We wanted to ensure that the results we initially achieved were accurate and sustainable.

The first test, multiple deliveries per week, focuses on improving our in-stock position in stores for regularly stocked SKUs.

The plan was to replenish our stores from their respective distribution center more frequently.

On last quarter's call we said a little over 900 of our 5,100 domestic stores were receiving either three or five times per week deliveries.

This was up from the usual once a week delivery schedules we've historically run.

With approximately 21,000 SKUs in an average AutoZone store we tested what increasing the replenishment frequency of these SKUs meant.

Although our inventory turns at a relatively low rate, around 1.5 times per year, the vast majority of our SKUs have an on hand quantity of 1. Therefore, given the randomness of demand, there's potential for out of stock positions.

There are clearly increased costs associated with delivering more frequently.

However, the sales lift achieved from our test has supported increasing the delivery frequency in the majority of the chain to either three times per week or five times per week, depending on certain parameters.

It is important to note that our current plans do not contemplate providing this level of service to all stores.

It just isn't currently economically viable everywhere.

Over the next 12 months we expect to roll this increased frequency model to approximately an additional 1,000 stores.

We will begin this rollout in the first quarter.

Roughly speaking we are modeling a gross margin headwind from this initiative of approximately 25 basis points each quarter until we complete the rollout.

It will take us a few years to roll out this new strategy, but once it is complete we would expect roughly two-thirds of our stores to have increased frequency of deliveries.

As we implement this further we will continue to monitor our performance and will further refine the stores on this program.

The second test that we are rolling out is a mega hub store concept.

We'll open and/or expand another handful of mega hubs in 2016, increasing from our current count of five mega hubs.

We are very excited about what the mega hubs can represent for us.

We will open these locations over the back six months of our fiscal year.

As a reminder these super-sized AutoZone stores carry between 80,000 to 100,000 unique SKUs, approximately twice what a hub store carries today.

They provide coverage to both surrounding stores and other hub stores multiple times a day or on an overnight basis.

Our sales results thus far in our open mega hubs are exceeding our expectations.

We have been pleasantly surprised to see the sales generated by the new unique SKU additions lifting both our retail and commercial businesses.

While there are incremental costs to these rollouts, such as payroll and fuel to manage the extra deliveries to surrounding stores, we feel their cost deleverage is relatively modest.

Our current assumption on this rollout is that we won't experience meaningful deleverage from this initiative in FY16.

Currently five mega hubs support approximately 750 surrounding stores, and once built out we'd expect to have a network of mega hubs in the neighborhood of 25 to 40 total locations.

Like the weekly deliveries from our distribution centers, we expect to complete our mega hub expansion over the next few years.

In order to support more frequent deliveries to new stores as well as the mega hubs, we expect to open two or three domestic distribution centers over the next two or three years.

For your modeling purposes each new distribution center is expected to cost between $40 million to $45 million.

At present we are in the early stages of planning their openings and don't expect any distribution center to come online in early -- until early FY17.

FY16 will incur some capital and operating expenses related to development, but a larger portion of the capital we spend will be in FY17 and FY18.

We are very excited to have reached a conclusion on these strategic changes.

We had a tremendous amount of AutoZoners who worked this extremely hard and with great discipline.

Due to their incredible efforts and patience, we believe we have identified the optimum approach to managing our supply chain.

In recent years AutoZone has completed small acquisitions with AutoAnything and IMC.

We currently expect our cash from investing in the business this upcoming year to look similar to this past year.

Our capital investments are expected to offset the capital used in the acquisitions.

To summarize our plans, we expect to roll out more frequent distribution center deliveries and more mega hub locations over the next few years.

We also expect to open two or three new domestic distribution centers over this time.

While our total use of capital will not be materially different than next year from this past, we do expect to incur an approximate 20 to 30 basis point gross margin headwind from these investments alone.

This past fiscal year we faced headwinds to our gross margin and we were able to overcome them and post improvements in each of our quarters.

We believe in FY16 we have opportunities for improvement, but we remain cautious as we know we'll experience more significant supply chain headwinds.

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

Our sales increased 7.9%.

Our domestic same-store sales were up 4.5%.

This quarter's sales results were stronger toward the back half of our fiscal quarter than the beginning.

While May was the weakest month of comp store performance, the comparison to the previous year's May was a contributor.

May was quite strong the year before.

The remaining months were very consistent.

We attribute this to consistent weather across much of the country and steadily lower fuel prices.

Regionally the Northeast and the Midwest performed slightly below our overall chain.

However, these two markets were slightly better the year before.

In regard to our three primary merchandise category splits, failure related, maintenance, and discretionary, failure performed best followed closely in growth over the last year by maintenance and then discretionary.

We attribute failure strength to more miles being driven across the country and failure occurring with the vehicle usage in addition to favorable weather.

Both traffic and ticket were positive for our DIY and commercial businesses.

We opened 134 new commercial programs in the quarter versus 113 last year.

For the year we opened 296 net programs for the full year, reaching 81% of our domestic store base.

Our sales grew 13% on the year, our programs opened grew by 8%.

We are proud of our commercial results this year, and as our programs continue to mature, we believe our future is bright.

As part of our strategy on increasing inventory levels in local markets closer to our customers, this past quarter we opened three additional hub locations and now operate 176.

As mentioned above regarding opening more mega hub locations, we do expect to open more standard hub locations as well.

Over time we expect to operate as many as 200 to 225 stores as hubs.

But that growth is expected over many years to come.

Regarding Mexico, we opened 23 stores this quarter and now have 441 total locations.

While Mexico's US dollar sales were below historic growth rates, we executed well especially in light of the foreign currency headwinds experienced with the peso.

Sales in our other businesses for the quarter were up 2% over last year.

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

Regarding online sales opportunities, there continued to be great opportunities for growth on both a business-to-business basis and to individual customers, or B2C.

These businesses are relatively small for us, representing just 3.4% of our total sales mix on the quarter.

Overall we feel like we are well-positioned in 2016 to improve on 2015's results, with the continued aging of the car population as we continue to be optimistic regarding trends for our industry in both DIY and DIFM.

As new vehicle sales are reaching all-time highs and gas prices on average are down year over year, miles driven continue to increase.

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

This trend is encouraging.

I know with our new fiscal year upon us many investors have asked about our expectations for 2016.

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

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

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

We believe we should improve in these regions.

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

And if we felt our sales would be challenged in the short term due to difficult comparisons, we wouldn't make material changes to our plans or operations.

We will continue to balance short-term and long-term performance and will be keenly focused on delivering consistent strong performance and extending our streak of 36 consecutive quarters of double-digit EPS growth.

However, with our delivery frequency initiative along with expanding mega hubs, we will likely have some headwinds on our operating margin.

Now let me review our highlights regarding execution of our operating theme for 2015.

WOW Every Customer, Everywhere.

The key priorities for the year were great people providing great service, profitably growing our commercial business, leveraging the internet, leveraging technology to improve the customer experience while optimizing efficiencies, and improving availability.

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

We've continually been upgrading our product content in both our electronic catalog and online offerings.

We've also been focused on improving our mobile app to be relevant across our fastest growing online category.

We've been aggressive on our technology investments and believe these initiatives will help differentiate us on a go-forward basis.

We believe -- or 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 our businesses.

In regards to commercial, we opened 134 programs during the quarter.

For the year we opened 296 versus 424 last year.

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.

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

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

We should also highlight another strong performance in return on invested capital, as we were able to finish 2015 at 31.2%.

We are very pleased with this metric as it is one of the best in all of hardlines 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 to 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 thank and reinforce how proud we are of our entire organization's efforts to manage the business appropriately and prudently.

We have an amazing team and our initiatives for 2016 are very exciting.

With our ongoing supply chain initiatives as well as new store openings, 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 I'll turn it over to Bill Giles.

Thanks, Bill.

Good morning, everyone.

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

For the quarter total auto part sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores, and our 20 IMC branches, increased 8.1%.

Now switching to macro trends, during the quarter nationally unleaded gas prices started out at $2.69 a gallon and ended the quarter at $2.51 a gallon, an $0.18 decrease.

Last year gas prices decreased $0.21 per gallon during the fourth quarter starting at $3.67 and ending at $3.46 a gallon.

We continue to believe gas prices have a real impact on our customers' abilities to maintain their vehicles and cost reductions help all Americans.

We hope to continue to benefit from this 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 2.6% in May and 3.9% in June, and we don't have July or August 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 for AutoZone store were $1.761 million.

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

Now for the quarter, total commercial sales increased 13.1%.

In the fourth quarter commercial represented 18% of our total sales and grew $70 million over last year's Q4.

This past quarter we opened 134 new programs versus 113 programs opened in our fourth quarter of last fiscal year.

We now have our commercial program in 4,141 stores supported by 176 hub stores.

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

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

While our average weekly sales per program for the full year were below some peers in our industry at $8,800, our productivity continues to improve.

It's important to highlight that we accelerated our new program growth over the past few years as approximately 26% of our programs are younger than three years old.

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

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

Looking specifically at our mature programs, those at least five years old, they averaged $10,000 per week this past year and grew 6.2% over last year.

While we will continue to open additional programs over the next several years, we will remain focused on improving the productivity of all our existing programs.

We also feel very good about the success we've had in profitably growing the commercial business and we like our trajectory here.

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

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

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

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

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

We believe we are well positioned to grow this business and capture increased market share, and we believe we can scale this business in a profitable manner.

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

Now moving on to Mexico, our Mexico stores continue to perform well.

We opened 23 new stores during the fourth quarter and 39 for the full year.

We currently have 441 stores in Mexico.

This upcoming year we expect to open a similar 40 new stores, and we are on target to open a new distribution center.

This will mark our second DC in the country and support central Mexico store growth.

While sales in base currency were above plan this past year, the devaluation in the peso was much greater than we assumed at the start of the year.

The peso devalued 28% over the course of the year.

This created a headwind that caused our reported US dollars and EBIT to be lower than last year.

The EBIT dollar impact on the quarter, assuming constant currency with last year's foreign exchange rate, was meaningful, approximately double-digit millions of dollars.

While we cannot control movements in functional currency versus planned assumptions, we feel the Mexico leadership did an exceptional job managing the peso denominated business.

And while we hope more favorable currency compares are in our future in FY16, we know our Mexico AutoZoners will continue to provide outstanding customer service.

If the peso stays at these elevated levels it will continue to pressure our US dollar earnings for the next several quarters.

Now regarding Brazil, we opened no stores in the quarter and had seven stores open at the end of the year.

Our plans remain to open a few stores this upcoming FY16.

While sales growth has been very encouraging, we have been challenged by a weak Brazilian real relative to US dollars as well.

While the peso devalued 28%, the real devalued 60% on the year.

We remain in test phase on Brazil, but have been more encouraged of late due to our improved operating performance.

And recapping this past quarter's performance for the Company in total, our sales were $3.290 billion, an increase of 7.9% over last year's fourth quarter.

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 52.5% of sales, up 20 basis points.

The improvement in gross margin was attributable to higher merchandise margins partially offset by the impact from higher supply chain costs associated with current year inventory initiatives and Interamerican Motor Corporation, which was acquired in September 2014.

In regards to inflation, it has been down slightly year over year.

Currently 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, but our commercial business is growing at an accelerated rate and it has lower margins which is adding pressure to our overall gross margins.

It is important to note we do not manage to targeted gross margin percentage.

We also understand the headwinds from expanding our distribution center deliveries will cause.

We will work diligently to offset these headwinds with a focus on lower acquisition cost.

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

SG&A for the quarter was 32.2% of sales, higher by 52 basis points from last year's fourth quarter.

The increase in operating expenses as a percentage of sales was primarily due to legal costs, higher legal costs, and the impact of the IMC acquisition.

The legal cost growth this quarter was attributable to discrete matters that we would not expect to continue.

The acquisition of IMC anniversary is this month in September, so we expect the majority of the deleverage to dissipate going forward.

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

EBIT for the quarter was $669 million, up 6.2% over last year's fourth quarter.

Our EBIT margin was 20.3%.

Interest expense for the quarter was $47.1 million compared with $49.4 million in Q4 a year ago.

Debt outstanding at the end of the quarter was $4.625 billion, or approximately $300 million more than last year's balance of $4.323 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 in line with last year's Q4.

We expect our annual rate to be closer to 36.5% on an ongoing basis as the deviation result is primarily driven by the resolution of discrete tax items that arise.

Net income for the quarter was $401 million and up 7.4% over last year.

Our diluted share count of 31.5 million was down 5% from last year's fourth quarter.

The combination of these factors drove earnings per share for the quarter to $12.75, up 13% over the prior year's fourth quarter.

Now relating to the cash flow statement, for the fourth fiscal quarter we generated $526 million of operating cash flow.

Net fixed assets were up 6% versus last year.

Capital expenditures for the quarter totaled $188 million and reflect the additional expenditures acquired -- required to open 97 new locations this quarter, capital expenditures on existing stores, hub and mega hub store remodels or openings, work on the development of new stores for upcoming quarters, and information technology investments.

For all of FY15 our CapEx was approximately $480 million.

With the new stores opened we finished this past quarter with 5,141 stores in 49 states, the District of Columbia, and Puerto Rico, 441 stores in Mexico, and 7 in Brazil for a total AutoZone store count of 5,589.

We also had 20 IMC branches open at fiscal year end taking our total locations to 5,609.

Depreciation totaled $87 million for the quarter versus last year's fourth-quarter expense of $79 million, in line with the recent quarter growth rates.

With our excess cash flow we repurchased $430 million of AutoZone stock in the fourth quarter.

At year end we have $348 million remaining under our share buyback authorization, and our leverage metric was 2.5 times at year end.

Again, I want to stress we managed through 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 113%.

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

The Company's inventory increased 9% over the same period last year, driven by increased product placement, new stores during the fiscal year, and the acquisition of IMC.

Inventory per location was $610,000 versus $582,000 last year and $629,000 last quarter.

The IMC acquisition increased inventory per location by $15,000 this quarter.

Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative $79,000 versus negative $87,000 last year and negative $68,000 in just the last quarter.

As a reminder, the addition of IMC has added $15,000 in inventory per location and reduced AP to inventory by approximately 2 percentage points.

As we will now be anniversarying the acquisition, we expect to dramatically reduce the pressure on these overall metrics going forward.

Finally as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.2%.

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.

Thanks, Bill.

We are pleased to report our 36th consecutive quarter of double-digit EPS growth, and for the year to report an EPS growth rate of 14.1%.

We also surpassed an historic milestone in 2015, exceeding $10 billion in sales for the first time in our Company's rich history.

Our companies continue to be successful over the long run.

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

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

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

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

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

Before I conclude, I want to take this opportunity to reflect on FY15.

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

In recognition of the dedication, passion, and commitment of our AutoZoners, I want to highlight that we grew sales to a record $10.2 billion this past year and we grew same-store sales at 3.8%.

We grew our store base in Mexico and managed our expenses exceptionally well in spite of the foreign-currency headwind with the peso.

We began our IMC integration, opened three new branches, and now have 20 locations.

With a minority of our AutoZone stores today able to sell IMC products, we feel we are well-positioned to expand this business in the future.

Our inventory availability testing and mega hub store remodels helped us to reach our conclusion and allowed us to announce our planned implementation schedule.

I could not be more proud of the tremendous work everyone on this project contributed.

And lastly we will talk more about saying yes, we've got it, to our customers.

We are fixated on making sure we meet our customers' needs in 2016.

Our offerings are the best they have ever been, and we are determined to communicate this to our customer base.

At the end of the day our customers have choices and we must exceed their expectations.

Again, we are excited about our initiatives around inventory assortment and availability, hub stores, commercial growth, Mexico, ALLDATA, eCommerce, Brazil, and IMC.

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

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

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

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

We believe our steady, consistent strategy is correct.

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

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

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

In the end delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves.

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

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

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

We are launching our Live the Pledge theme and I know our leaders, combined with our talented team of roughly 80,000 AutoZoners, will do just that.

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

(Operator Instructions)

Seth Basham, Wedbush Securities.

My first question is regarding the new distribution strategy.

Obviously you guys have worked really hard to test it.

You now have a plan to roll it out.

Just trying to better understand the return dynamics and the financial implications here.

So previously you had stated that you expect about $1,000 to $1,500 per week lift per store when all is said and done from this initiative.

I want to confirm that's still on target.

I will start with that $1,000 to $1,500 per store is the target when they get both initiatives.

Now, I said in our prepared comments that about one-third of the stores will not receive more frequent delivery.

And so some piece of that will not flow through to them, but on stores that get both the mega hub and the increased frequency of delivery it will be in a range of $1,000 to $1,500.

It's a little tough still at this point to narrow that range.

There's just a lot of variability depending on many different factors.

Got it.

So as you roll this out to 1,000 stores next year, about 20% of your base, it would appear that on a run rate basis that should be driving -- boost the comps between 75 and 100 basis points.

At the same time you'll be experiencing some gross margin pressure of about 25 basis points.

But that looks like a pretty good trade-off in my book.

It looks like you'll be growing gross profit dollars from this initiative around $50 million next year on a run rate basis versus about $25 million of gross profit or expense associated with the rollout.

That's a pretty good return.

Is that the right way to think about it?

Well you did a lot of really good math there very quickly.

Much quicker than I can do it.

I think generically speaking you're in the ballpark.

And we're not going to go forward with these initiatives unless we think they are going to provide us with a growth in operating profit dollars that exceeds our return metrics.

And we think that both of these initiatives will do that.

Now we didn't think that it would do it in the lowest volume stores, which is why we're not going to roll it to those stores at this point in time.

Got it.

Understood and good luck.

Kate McShane, Citi Research.

I just wondered more specifically on the quarter and then I had a question about the successful test.

For the comp during the quarter can you talk a little bit about how you did compared to your plan, and if there was upside to your plan where it did come from?

Generally speaking that performance versus our plan was pretty much on track particularly in the retail business.

Frankly we had a pretty aggressive plan in the fourth quarter that we were a little bit daunted about coming into the quarter.

May was very soft and we were behind, but June, July, and August outperformed and generally ended on plan.

Okay.

Thank you.

And my second question is just on some of your commentary around your DC buildouts and opportunities for new store growth.

How should we think about that from a location standpoint?

Where are you aiming to build out your stores, and with regards to DCs where could they be located, and are you considering where they're located in relation to how your competitors' supply chains are now?

Sure.

As far as today, we have distribution centers that can service our current strategy for anywhere in the United States.

We are not prepared yet to talk about specifically where these next two to three distribution centers are, we still have some work to do, but we can service every store today.

The reason we need to expand it is one, as we continue to grow our store count we need more capacity in our supply chain.

And then secondly as we move to increased frequency of deliveries, we need to have some distribution centers that are closer in certain parts of the country.

And that's what we'll be solving with these extra two to three distribution centers.

Okay.

Thank you.

Simeon Gutman, Morgan Stanley.

Following up on Seth's question regarding I guess some of the margin trajectory going forward, Bill, you said some of these investments will weigh on margins.

You quantified the 25 bps from the multiple delivery, and I think you said very modest deleverage from -- on the SG&A line from DCs.

In all that doesn't seem like a big amount.

This quarter I think you had that run rate and ex some of those currency headwinds and legal you would have seen margins if not up at least flattish.

So my question is, is there a specific outlook on the margin side?

It feels like margin could still go up even with that 25 basis point headwind.

Do you agree, or are you just trying to take a cautious outlook ahead of the rollout?

I think the way I would answer that is that we wanted to carve out at least what the impact was of the initiative very specifically.

So we said that that was 20 to 30 basis points, majority of that is in gross margin as you highlighted.

A little bit of that would be in SG&A to support the mega hub operational activities.

And frankly you're right, we had about a 24 basis point impact in supply chain for this past quarter, which is probably a pretty good way to look at it for the next several quarters as we continue to roll out stores.

Now, separate and distinct from that our merchandising organization has done a terrific job in lowering acquisition costs, doing some price optimization, and they've done a very good job in offsetting those costs.

So I think there are other opportunities for us to continue to improve gross margin rates.

But we can clearly identify and quantify the investments and we wanted to highlight those for you.

But I think as we look out over the year we feel pretty good about overall margin rates, but clearly we'll have some headwinds.

Okay.

My follow up on the test, on the multiple delivery tests or the stores that you've been operating for a year, can you give a little more color about the traction you're seeing?

Bill Rhodes mentioned saying yes more frequent.

Are you growing the basket with the existing customer?

Are you moving up on the call list?

Are you getting new customers that wouldn't -- that didn't previously do business?

A little more color on it so we can appreciate the curve of improvement after the rollout is ongoing.

I would say that number one, we are seeing the benefit in both our retail and commercial businesses.

We've been very pleased with the performance to date.

Now this is -- you have to remember this is slower moving inventory, so when they call us and we have it you can get the sale pretty much immediately.

So we haven't seen a big ramp in what has happened over time.

I do hope and expect over time with our commercial customers the more frequently we say yes the more we'll move up their call list.

That's all on increased frequency of delivery.

Regarding mega hubs, that is a substantial different offering than we've ever had in the marketplace.

And I think by us being able to surprise and delight our [commercials], both retail and commercial, that that's beginning to build traction over time.

Okay.

Thanks.

Dan Wewer, Raymond James.

When you think about the eventual distribution network of 11 DCs and 40 mega hubs, AutoZone's capital investment in distribution will still be less than half of competitors such as O'Reilly and Napa.

When you think about the endgame a few years out, how will the parts coverage compare to those competitors?

We know it will be significantly better than what AutoZone has had in the past, but if you were to benchmark it against those competitors that made that a much larger investment.

What will be the difference?

I think we'll be at the top of the heap in the industry with access to inventory.

Certainly where we have frequency of delivery at three to five times a week we will be able to close out those in-stocks.

When you think about it, you're trying to solve two different problems.

One is an in-stock problem where you have very low demand, and when it spikes if you don't have an increased frequency of delivery, you're out of business for eight days.

We believe this 10 to 11 distribution center model will allow us to do that at the optimum level.

That does not mean that we won't forgo a few sales here and there, but we want to make sure that we get a return on the investment that we're making that is sufficient for our expectations.

Then secondly with the mega hub you're trying to solve expanded parts only.

And by putting these 25 to 40 mega hubs in the markets, we are going to significantly increase the local market availability of product to 80,000 to 100,000 SKUs.

That helps both our retail customer and our commercial customer on a same-day basis in those markets.

And then on an overnight basis, it will go to other hub stores, which I think is best in class solution.

So if you think about the potential for an extra $1,500 of revenues per week per program where both of the initiatives are in place, your commercial run rate is still about $200,000 less per program let's say compared to O'Reilly.

Is the difference the fact it's going to take a multiple number of years for your customers to recognize that your capabilities are greater?

Or are we not factoring in that perhaps there's going to be a need for a larger number of salespeople at AutoZone?

I would think that the upside could actually be more than the $1,500 that you were suggesting.

First of all we said $1,000 to $1,500, Dan.

But I appreciate your optimism.

And I hope you're right too.

I hope the upside is more than that.

Our testing hasn't proven that out yet, but as I mentioned a few minutes ago over time the more you say yes to your commercial customers, especially on hard to find parts, the more confidence they're going to get with you and there could potentially be a halo effect over the long term.

Look, this is a significant improvement for us, but it's not a silver bullet.

We still have to continue to refine the way we go to market, make sure we've got the right product offerings, make sure that we have the best sales force, which I think we do.

And on and on.

It's going to take us some time, but we are closing those gaps even as we speak.

Great.

Thank you.

Michael Lasser, UBS.

Bill, as you look out at the industry over the next few months, it seems like the low gas prices are here to stay.

The weather could be unique given some of the predictions that are out there.

So what do you think is going to have a greater influence on demand for the industry, gas prices or the weather over the next few months?

I would say that from a consistency perspective I think the gas prices have clearly done a couple of things for us, one of which is it has increased disposable income, particularly for our customer.

And it also seems to have attributed to increase in miles driven, and we're seeing some miles driven numbers that are historically very high relative to anything we've seen in the past.

And so I think those two things, which increase wear and tear on automobiles, those are the -- and the ages of the vehicles.

Those three factors I think are probably going to help support demand for the industry, for over the long term.

The weather, you may be right.

It's very hard to predict for us.

Obviously we had some favorability this fourth quarter, particularly towards the end, but that's really difficult for us to predict and forecast.

And we'll have to see it as it comes.

But on the other ones I think that those really are favorable underlying trends to the health of the industry.

Okay.

Following up on the inventory strategy that you're pursuing, I think the market has come to expect a lot of flexibility in your cost structure, where as sales gyrate from quarter to quarter you're still able to produce the type of earnings that you have.

Does the new inventory strategy reduce that flexibility, such as if the sales don't come through the margin performance could be more at risk?

I guess theoretically that's probably true because we're adding some increased fixed cost structure to the organization, but at the same time as you pointed out we've been very good at determining how to manage our overall cost structure given the environment that we're dealing with.

Having said that, we are committed to this initiative and we're very encouraged by it and we're going to see it through.

Okay.

Last quick one, a few years ago you were decreasing your share count year-over-year by high single-digit pace, that's moderated into more like a mid-single-digit pace.

Is that the reasonable rate to expect moving forward?

I think so.

It's obviously PE -- it's dependent on the PE.

So as our PE has gone up obviously our share repurchase as a percent has declined as you said to mid-to-high single digits to just this past quarter 5%.

So it's going to continue to be a very important part of our capital allocation strategy and it's going to be a very key element of us driving EPS growth.

We've got a nice balance of organic EBIT growth and share repurchase to drive EPS and I expect that to continue in the future.

Cool.

Thank you so much.

Matthew Fassler, Goldman Sachs.

I appreciate all the additional information on the call today.

My first question relates to this quarter and just trying to understand some of the improvement.

It looks like commercial saw more acceleration.

And Bill, you gave us that 6.2% increase for mature programs.

Can you tell us how that 6.2% compared to what you had done over the prior quarter or two?

And to what degree do you think the improvement you generated in commercial is it all a function of some of the early testing and rollouts that you've been implementing on the inventory and hub side?

I'd say the 6.2% is probably a bit of an acceleration, and as we highlighted that's in our mature program.

So we've see a little bit of acceleration on that.

And with some of the other questions we were going through on commercial, some of that relates to some of the things that we've done around inventory availability and inventory initiatives.

But keep in mind we've got several initiatives in our commercial programs and we've got a lot of things that we're working on in order to continue to drive that average weekly sale or average dollars per program every day.

So it's not just inventory availability initiatives, although that's been helpful.

Great.

Second question, as we model out the gross margin or the aggregate margin impact of the supply chain investments, you spoke about approximately 25 basis points year on year.

Is that 25 basis points each year incremental to the prior year until the rollout is essentially done?

Theoretically yes.

Although my guess is that as we get past a year or 18 months that we'll be able to anticipate some of that impact with improved sales performance and other tactics to improve margin rates.

Got it.

And then finally as you think about the incremental inventory, I know the dollars are not huge, to the extent that Bill Rhodes alluded to it as a slow turning inventory, to what degree do you think vendors are going to be able to carry that for you as a payable relative to the base?

That's a good question.

Right now we're at a 1.5 times turn.

And so if we can keep it around that number, I think the vendors should be able to support our AP inventory ratio where it is.

Okay.

Thanks so much, guys.

Greg Melich, Evercore ISI.

I have some housekeeping and a strategic question, but first on the housekeeping, if I got it right the CapEx is probably going to go up to around $600 million if you factor in M&A.

But then it should build even a little more into 2017 given that's when the DCs will actually open.

Did we get that right?

Did I get that right on the cash flow side?

I think you're pretty close on that, on the $600 million, maybe a little bit of an increase over that.

We'll have a little bit of DC dollars in 2016 but more in 2017.

Okay.

Great.

And then I want to make sure, on the strategic side in the prepared comments I heard you guys mention the new hard parts placement techniques.

And I assume that's all part of the mega hubs and the expanded availability, but is that all that is or is there something else going on there?

It sounded like it might be a new software system or algorithms you run to figure out where to put those parts, or am I reading too much into that?

I'm sorry we weren't clear enough.

That's the work that we did a year, year and half ago where we updated the algorithms to place -- forward place the inventory with a slant towards newer merchandise, newer lifecycle of vehicle merchandise.

So that work has been done for about a year now and it's worked very well.

Now we're using those same methodologies to assort our mega hubs, and as we continue to roll those out we'll leverage that methodology there.

Got it.

And then as part of that, that 21,000 SKUs per store, it sounds like as this plays itself out with more daily replenishment your plan is not to change that.

That would have been shifted a couple years ago with these algorithms.

This is now just making sure you're in stock faster?

That is exactly correct.

We'll modify our SKU count by category every time we do a category update, but the step function change in what we were going to stock in a store has been done.

Now we're going to make a step function change in 70% of the stores on how frequently they receive their replenishment orders.

Lastly if I could follow up on that, how does this change -- you've always had a very strong private label program and you've built these brands, Duralast in particular, how does this shift affect that if we think out three, four, five years?

Great question.

It will have zero bearing on our merchandise strategy and branding strategy.

Duralast has been a terrific strategy for us and it will continue to be so.

Great.

Thanks a lot.

Chris Horvers, JPMorgan.

So wanted to, from an understanding perspective, what are the buckets of higher fixed costs associated with the inventory initiatives?

And perhaps any quantification of how much your cost structure will become more fixed over time?

Maybe as a percentage of total -- from a percentage of total cost perspective?

Well you've got two things going on, one of which is that we'll open three distribution centers over the next several years.

So that will increase the cost structure.

We believe that obviously placing those distribution centers will reduce our transportation costs, so hopefully that will offset it.

And then there will be some increased transportation equipment if you will, tractors and trailers, in order to increase delivery frequency.

So those are the costs.

They're not overly significant, but you're adding some capital into the equation.

And then from an ability to be flexible in terms of the rollout with the mega hubs and the increased frequency of delivery, is that something that you could perhaps accelerate more quickly if you saw more success?

And then on the other side if the environment weakened, is there an ability to dial those back?

On the margin, absolutely.

But obviously there's a lot of work involved in increasing the delivery.

Like I said there's transportation equipment required, people required, and then the same on the mega hubs.

We've got to find the real estate and expand the locations or create a new location.

So there's some lead time in being able to do this and being able to do it in an efficient and profitable manner.

Last question, in case I missed it did you mention how many stores currently have both mega hub and increased frequency?

And how do you think about the percentage of stores that will have those long term?

Thanks.

We specifically said we've got about 900 stores on increased frequency of delivery.

And from our five mega hubs we have about 750 stores that are being serviced by those.

I don't even know off the top of my head how many of them have both.

Over the long run about 70% are going to have increased frequency of delivery.

And the majority of the stores are going to have mega hubs, but ones that are in remote locations or small volume stores won't have either one of those.

Thanks very much.

Now I'd like to hand the call back over to Mr. Bill Rhodes.

Sir?

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

We're excited about our growth prospects for the year.

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

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

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

We thank you for participating in today's call.

That concludes today's call.

Thank you for your participation.

You may now disconnect.