汽車地帶 (AZO) 2016 Q1 法說會逐字稿

Good morning and welcome to AutoZone conference call.

(Operator Instructions)

Please be advised today's call is being recorded.

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

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

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

The conference call will end promptly at 10 a.m.

Central Time and 11 a.m.

Eastern Time zone.

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

Certain statements contained in this press release 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, or in the prospect of war including terrorist activity, construction delays, access to available and feasible financing, the compromising of the confidentiality, availability or integrity of information including cyber security attacks and changes in laws or regulations.

Certain of these risks are discussed in more detail in risk factor section contained in item 1-A under Part 1 of this Annual Report on form 10K for the year ended August 29, 2015.

And these risk factors should be read carefully.

Forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements and events described above and in the risk factors could materially and adversely affect our business.

Forward-looking statements speak only as of the date made.

Except as required by applicable law, we undertake no obligation to update publicly forward-looking statements, whether as a result of the new information, future events or otherwise.

Actual results may materially differ from anticipated results.

It is now my pleasure to introduce your host for today's call, Mr. Bill Rhodes.

Sir, you may begin.

Good morning, and thank you for joining us today for AutoZone's 2016 first-quarter conference call.

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

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

If not, the press release, along with slides complimenting 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.

The first quarter has been very busy for us.

We continued to organically grow our business while expanding our initiatives designed to drive sales.

We expanded our US retail footprint with the opening of another 22 net new stores.

Our commercial business continues to gain traction, growing sales 10% with 55 net new programs open for the quarter.

We had the commercial program in 81% of our domestic stores, and we continue to expand our presence in Mexico, opening one store in the quarter.

Also in Brazil we opened an additional store and now have eight stores in operation.

Lastly, we opened two new IMC branches.

While we currently have approximately 90% of our total Company sales coming from our domestic AutoZone stores, we believe we have great growth opportunities with both electronic commerce and store openings outside the US for many years to come.

Along with our key strategic investments, we continued to spend a lot of time on initiatives to drive our core domestic retail business.

The DIY operations remain our number one priority and the business did quite well in the first quarter.

We generated positive traffic and ticket on a same-store basis, and performance was generally consistent across the country.

While the macro economy is favorable for DIY performance right now, we continue to gain share and would attribute those share gains to our investments in store labor and our inventory availability initiatives.

We are committed to providing WOW!

customer service at every store with every customer.

Regarding commercial, we have continued with our inventory placement and distribution strategies 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 continued the rollout of more frequent deliveries to an additional 80 net new stores in the quarter.

As we discussed in our last quarterly conference call, this rollout focuses on increasing from once a week deliveries from our distribution centers to either three or five times.

Our results continued to confirm that this new strategy is appropriate

With the varying weekly sales, replenishment needs vary as well.

Over the remainder of the fiscal year we expect to roll this increased frequency model to approximately 1000 additional stores, ending the fiscal year with approximately 2000 stores with this enhanced service level.

The implementation of this initiative will create a gross margin headwind of approximately 30 basis points each quarter until we complete the rollout.

While this effort will take a few years to complete, we would ultimately expect about two-thirds of our stores to have increased frequency in deliveries.

This quarter we only implemented this initiative in 80 net new stores.

This past quarter our focus was on rolling out multiple deliveries to our hub stores.

We focused our efforts on this group of stores because they service so many other stores.

Additionally, we continued to be very pleased with our sales results from the mega hub stores.

We ended the quarter with five mega hubs in operation, with no new openings this quarter, although we expect to add a handful of additional mega hubs over the balance of the fiscal year.

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

They provide coverage to most 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 to their markets lifting both our retail and commercial businesses.

While there's incremental cost to these rollouts in payroll and fuel to execute the extra deliveries, 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 2000 stores on a same-day or overnight basis, and once built out we expect to have a network of mega hubs in the neighborhood of 25 to 40 locations.

Consistent with the increased frequency of delivery from our distribution centers, we expect to complete our mega hub expansion over the next few years.

We also continue to roll out our new store prototype that significantly expands the hard part holding capacity in our stores.

All new stores are opening now with this new prototype, and we remodeled 29 additional constrained stores and now have a 126 completed locations.

Each of these efforts that are focused on improving our availability of inventory have result in an increase to our store level inventories.

They've also added incremental cost.

Sales have justified our investments though, and offered convincing proof that we remain on the right track.

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

As I mentioned a few minutes ago we continue to invest in store labor in order to say yes, we've got it more frequently.

Yes, we've got it is a new operating mantra for us in 2016.

We've made material and meaningful enhancements in the last few years to our availability of inventory, and now it is time to ensure our customers experience and see that substantial change.

With traffic up across our stores, we understand and appreciate the need to be appropriately staffed to handle our customers' needs.

When a customer has a request for a part, product, or simply advice, our objective is to say to them yes, we've got it.

While early in the implementation phase, our team has enthusiastically embraced this notion.

And with the current positive macro environment, we want to make sure our AutoZoners have the tools, and specifically the staff, necessary to provide our customers with WOW!

customer service experience they deserve.

We also continue to make significant investments -- systems investments and enhancements to capture data about our customers' shopping patterns across all of our platforms.

We believe it is essential to be able to share information and processes seamlessly between our stores, commercial shops, phone and online experiences in order to meet all of our customers' needs.

While we are in the early stages of this work, we believe having a holistic and seamless enterprise-wide perspective of our customers will benefit us greatly over the next several years.

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

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

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

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

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 Company CapEx will not be materially different this year from the past, we do expect to incur an approximate 20 to 30 basis point gross margin headwind from these investments alone.

In FY15 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 continue to have opportunities for improvement, but we also have new headwinds.

Now turning to the first quarter's results.

Our sales increased 5.6% on top of 8% growth in Q1 of last year.

Our domestic same-store sales were up 3.5%.

This quarter's sales results were very consistent throughout the quarter, excluding the last two weeks.

The last two weeks of Q1 last year were particularly strong due to the extreme cold across much of the country.

Remember the polar vortex?

Every year when first significant cold spell arrives we experienced significant growth in hard parts sales, and customers are reminded of the importance of doing the maintenance work necessary to prepare their vehicles for the winter driving season.

Last year that first cold weather event was pulled forward into Q1 when it usually occurs early in Q2.

While weather is always an important factor for sales, over time the impact evens out.

Regionally the Northwest, Northeast and Midwest performed slightly below the overall chain.

However, these two Markets were better the year before.

In regard to our three primary merchandise category splits, discretionary products sales performed the best.

Maintenance followed, and then failure-related merchandise.

We attribute the recent strength in discretionary category to be due to lower gas prices freeing up money for our customers.

While important, discretionary remains our lowest mix of sales, approximately 80% of total domestic store sales.

So the impact of accelerated growth in these categories is not the most significant driver of our overall sales.

We are still a failure parts driven retailer, representing approximately 50% of total sales.

And the lack of early winter this year muted our sales in failure-related categories.

As I said earlier, both traffic and ticket were positive for our DIY and commercial businesses.

For the quarter we opened 55 net new programs in commercial, and have the commercial program in 81% of our domestic store base.

While our sales grew 10% on the quarter, our programs open grew by 7%.

While the commercial business -- commercial sales growth rate was a bit slower than last quarter's pace, we continue to be pleased with the progress we are making.

We believe our future in this business remains bright.

As part of our strategy of increasing inventory levels in local markets closer to our customers, this past quarter we opened two additional hub locations and now operate 178 traditional hubs.

In addition to our opening more mega hub locations, we also expect to open additional standard hub locations.

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

Regarding IMC, we opened two new branches this quarter and are excited by our opportunities.

This year IMC will be busy.

We opened a few more locations this year, and expand access to their original equipment inventory to more AutoZone stores.

The IMC parts catalog is accessible to around 600 AutoZone locations today.

So we see great sales growth opportunities in the future for both our retail and commercial customers.

Regarding Mexico, we opened one store this quarter and now have 442 total locations.

While foreign currency headwinds persist, Mexico's peso sales have done well.

Assuming the peso stabilizes, we expect the pressure on US dollar earnings from our Mexico business to abate starting next summer in the June/July time frame as we begin to lap the exchange rate increases.

For the quarter, the foreign currency headwinds lowered our EBIT growth rate by more than 1 percentage point.

Sales in our other businesses for the quarter were up 4% over last year.

As a reminder, our ALLDATA and e-commerce businesses, which includes AutoZone.com and autoanything make up this segment of sales.

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

With the continued aging of the car population, 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 materially, miles driven continue to increase.

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

This trend is encouraging.

While we understand recent weather has been warmer and we are up against a quite cold winter last year, we are still optimistic we can grow sales for upcoming quarters.

While we focus on both short-term and long-term performance, we remain committed to delivering consistent, strong earnings performance and extending our streak of 37 consecutive quarters of double-digit EPS growth is an important milestone for us.

While our delivery frequency initiative and expansion of our mega hubs will add some headwinds on our operating margin for the remainder of the fiscal year, our focus remains growing operating profit dollars at acceptable return levels.

Now let me review our highlights regarding execution of our operating theme for 2016, Live the Pledge.

The key priorities for the year were great people providing great service, profitably growing our commercial business, leveraging the internet, improving inventory availability and yes, we've got it.

On the retail front this past quarter under the great people providing great service priority, we increased staffing levels in our stores.

We've also been focused on improving our mobile app and AutoZone.com to increase our relevancy across our fastest growing online category.

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

We realize as customers have become much more tech and mobile savvy, we have to have a sales proposition that touches all the ways they desire to interact with us.

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

On the yes we've got it front, we've added training, metrics and most importantly, share of voice to educate our store level AutoZoners to help all of our customers with any part, product or advice needs they have.

We are very excited about what this initiative can mean.

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

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

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

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

Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to thank our entire organization for their commitment to managing the business appropriately and prudently.

Now I'll turn it over to Bill.

Thanks, Bill.

Good morning, everyone.

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

For the quarter total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores and our 22 IMC branches increased 5.6%.

Now switching over to macro trends during the quarter, nationally unleaded gas prices started out at $2.51 a gallon and ended the quarter at $2.09 a gallon, a $0.42 decrease.

Last year gas prices decreased $0.64 per gallon during the first quarter, starting at $3.46 and ending at $2.82 a gallon.

We continue to believe gas prices have a real impact on our customer's ability to maintain their vehicles and as 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 11 years old, the current average, is much different than on newer cars in terms of wear and tear.

Miles driven increased 2.3% in August and 4.3% in September.

Now, we don't have October or November data yet.

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

For the trailing four quarters, total sales for AutoZone store were $1.773 million.

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

For the quarter total commercial sales increased 10%.

In the first quarter commercial represented 18% of our total sales and grew $39 million over last year's Q1.

While the sales trajectory of the business slowed a bit in Q1, we are continuing our efforts to grow this business.

This past quarter, we opened 55 new programs versus 61 programs opened in our first quarter of last fiscal year.

We now have our commercial program in 4196 stores supported by 178 hub stores.

Approximately 1106 of our programs are three years old or younger, or 26% of the base.

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

While our average weekly sales per program for the last 12 months are below some peers in our industry at $8800, our productivity continues to improve.

Our focus remains on growing both sales and profits at an accelerated rate compared to our retail business.

Looking specifically at mature programs, those at least five years old, they averaged $10,000 per week this past year and grew mid-single digit 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.

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

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

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

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

We believe we can scale this business in a profitable manner and are excited about our opportunities in this business for many years to come.

Our Mexico stores continue to perform well.

We opened one new store during the first quarter.

We currently have 442 stores in Mexico.

For the year we expect to open approximately 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 quarter, the devaluation in the peso remains a material headwind to US dollars reported for operating profit.

The peso finished Q1 21% below last year's quarter-end rate.

This weakness created a significant headwind on our reported US dollars and EBIT.

As Bill previously mentioned, for the quarter foreign exchange headwinds lowered our EBIT growth rate by more than a percentage point.

While we cannot control movements in functional currency versus planned assumptions, the Mexico leadership continues to do an excellent job managing the peso denominated business.

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

Now, regarding Brazil we opened one store in the quarter resulting in eight stores open at the end of the quarter.

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 21%, the real devalued 48% this year versus last.

This extraordinary volatility was managed as best as possible.

We remain in test phase in Brazil, but have been encouraged by our operating performance.

Recapping this past quarter's performance for the Company in total, our sales were $2.386 billion, an increase of 5.6% over last year's first quarter.

Domestic same-store sales, or sales for stores open more than one year, were up 3.5% for the quarter.

Gross margin for the quarter was 52.5% of sales, up 45 basis points.

The improvement in gross margin was attributable to higher merchandise margins partially offset by higher supply chain costs associated with current year inventory initiatives.

In regards to inflation, it remains subdued at basically a flat level to last year across merchandise categories with pockets of deflation.

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 a targeted gross margin percentage, and we also understand that headwinds expanding our distribution center deliveries will cause.

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

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

SG&A for the quarter was 34.2% of sales, higher by 17 basis points from last year's first quarter.

The increase in operating expenses as a percentage of sales was primarily due to higher domestic payroll and the impact of IMC, which were partially offset by the favorable comparison to last year's higher legal cost.

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

EBIT for the quarter was $438 million, up 7.2% over last year's first quarter.

Our EBIT margin was 18.4%.

Interest expense for the quarter was $35 million compared with $37.1 million in Q1 a year ago.

Debt outstanding at the end of the quarter was $4.754 billion or approximately $350 million more than last year's balance of $4.402 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 slightly higher than last year's Q1 tax rate.

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

Net income for the quarter was $258 million and up 8.3% over last year.

Our diluted share count of 31.1 million was down 5% from last year's first quarter.

The combination of these factors drove earnings per share for the quarter to $8.29, up 14% over the prior year's first quarter.

Relating to the cash flow statement.

For the first fiscal quarter we generated $324 million of operating cash flow.

Net fixed assets were up 5% versus last year.

Capital expenditures for the quarter totaled $87 million and reflected the additional expenditures required to open 27 new locations this quarter.

Capital expenditures on exiting stores, hub and mega hub store remodels or openings, work on development of new stores for upcoming quarters and information technology investments.

With the new stores opened, we finished this past quarter with 5163 stores in 50 states, the District of Columbia and Puerto Rico, 442 stores in Mexico and 8 in Brazil for a total AutoZone store count of 5613.

We also had 22 IMC branches open at fiscal quarter-end, taking our total locations to 5635.

Depreciation totaled $66 million for the quarter versus last year's first quarter expense of $61 million, in line with recent quarter growth rates.

With our excess cash flow, we repurchased $400 million of AutoZone stock in the first quarter.

At quarter end we had $698 million remaining under our share buyback authorization and our leverage metric was 2.5 times at year-end.

Again I want to stress we manage 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 growth inventory finished the quarter at 110.6%.

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

The Company's inventory increased 7.2% over the same period last year, driven by increased product placement and new stores during the fiscal year.

Inventory per location was $624,000 versus $604,000 last year and $610,000 last quarter.

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.

Thank you, Bill.

We are very pleased to report our 37th consecutive quarter of double-digit EPS growth, growing this quarter at a rate of 14% over last year.

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 a strong attention to detail and exceptional execution.

We are confident in our initiatives, and we are pleased with the progress we are making in rolling out our new supply chain model by delivering inventory to our stores on a more frequent basis.

In addition, the performance of our mega hubs has been strong and we look forward to opening more.

We believe these initiatives will benefit both our retail and commercial businesses.

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 in 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 that solid, consistent strategy combined with superior execution drives success.

Our charge remains to optimize our performance, regardless of market conditions, and continued 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 not be content.

We have a lot of work in front of us over the next three quarters, but the future looks bright.

Before moving to the Q&A section, I'd like to address some of our recent organizational changes.

In late September Larry Roesel informed us he was retiring this fall.

Larry led our commercial business for 8.5 years and we experienced tremendous growth during his tenure.

We thank Larry for his incredible contributions to our success and wish he and his wife Beverly all the best in retirement.

Additionally, Mike Womack recently informed us that he and his family will be move back to their home in Ohio.

Mike has led our Human Resources organization for 3.5 years.

Under his leadership our HR processes have continued to improve.

We wish Mike and his family all the best as they return home.

In light of these changes, we have elevated three long-term AutoZoners to Executive Vice President and we have promoted five AutoZoners to Senior Vice President.

I am very excited about these individuals, their promotions, and the impact they will have on our business.

These are very talented leaders and they have tremendous AutoZone tenure.

On average these eight AutoZone leaders have over 25 years of AutoZone tenure.

This is a great testament to our unique and powerful culture, and it highlights that our diligent work around succession planning is paying dividends.

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

Thank you, sir.

(Operator Instructions)

Our first question is from Simeon Gutman with Morgan Stanley.

Thanks.

Good morning and nice quarter, guys.

Thank you.

On multiple delivery and DC rollouts, I guess DCs eventually have come in (technical difficulties).

I missed some of the prepared remarks, but I guess an expectation of maybe some time late this fiscal year or next.

If you think about the cadence of investments, the 20 to 30 basis points or so from supply chain, how does the DC investments play into that?

Does it bump it up, does it -- will you get other benefit to take it down?

Yes, couple of great questions.

First of all, we will open our distribution center in Mexico, our second DC in Mexico, hopefully by this fiscal year or first of next fiscal year.

The two DCs that we're working on domestically currently will not open until 2017.

Hopefully, one in the first or second quarter and then the second one in the third or fourth quarter.

As you know, those things take time.

As those distribution centers open, clearly they will have some capital investments.

But on the operating expense front, I don't think that they will be a material contributor to drive our operating expenses up or down.

As we do more frequent deliveries, they're going to have some benefits because the stem miles of the transportation routes will be shorter.

But obviously, they'll have incremental operating expenses of having the new facility and a new management team and all those things.

I think those will net out generally.

Okay.

And then one quick follow-up.

Granted it's early days with the multiple delivery, but I imagine in store some of these inventory, the completion is changing a little, more depth and maybe less safety stock.

Is that the case?

How are stores acclimating to it?

Are there -- is there any protocol in store to minimize disruption?

And obviously, that should be translating into sales.

I would say that was one of the things we looked at when we first started our test on this program.

The store operators like it.

They like it a lot.

Number one, when the truck comes in, it's in bite-sized pieces.

So it's much more easy to work into the daily activities versus being the big event of the week where they have to have all hands on deck.

So they like it.

Yes, it pulls down safety stock, which one of the challenges we have when we talked about our store of the future trying to eliminate some of the physical constraints that we have in our stores.

One thing this does is pull down the safety stock and allows us to put more parts on the shelf.

So from an operating standpoint, I think it's all systems go and they really like it.

Okay, thanks.

Thank you.

Our next question is from Mr. Dan Wewer with Raymond James.

Thanks.

Good morning, Bill.

Good morning.

You'd noted that obviously, the commercial revenue growth at 10% is quite good, but you did note that it decelerated from previous quarters.

When you look at the results for the stores that are commercial programs that are still being delivered to once a week compared to those that are on a three- to five-week schedule, was there a deviation in their sales performance?

Yes, Dan there's clearly a deviation.

But I would say first of all that the benefits that we see from both of the inventory availability initiatives are both on the retail side and the commercial side.

I wouldn't say that those stores reacted any differently in comparison than they did in Q4, if that makes sense.

So when you looked at the bit of moderation in revenue growth in commercial from 4Q it was pretty much the same, and whether the stores are being shipped to once a week or three to five times per week?

Yes, I think that's right.

And as a reminder, when we do the delivery frequency in the mega hubs, we see about a $1000 to $1500 per store if you get both elements of that.

That differential seems to be confirmed in everything we've done so far.

And we did see a moderation in our sales growth kind of across the board.

And then just one other follow-up question.

On the incremental commercial growth, how is that splitting out between doing more business with existing customers, or are your salespeople now engaging new customers and making them aware of your greater capabilities?

If you could talk about how that split is developing.

Yes, I think it's a combination of both.

Clearly as we mentioned, we've grown our mature programs in the mid-single digit rate.

So we're getting more productivity out of our existing base programs as they continue to mature.

But clearly with our opportunities to say, yes we've got it, on a more frequent basis and be able to deliver products more timely, both through more frequent deliveries as well as the mega hub network and being able to communicate that to our customers with our sales force is an important thing.

And we've been able to do that.

And I think we'll continue to gain traction over time.

Bill, if I could sneak in real quick question.

Can you remind us how important are your commercial customers Firestone and the service part of Pep Boys to Autozone?

We don't talk about specifics on our commercial customers but obviously, Firestone is one of our great customers.

We appreciate their business, but I don't want to get into specifics on them.

And obviously we don't do much, if any, business with Pep Boys.

Okay, thank you.

Our next question is from Christopher Horvers with JPMorgan.

Hi.

It's actually Mark Becks on for Chris.

Historically the DIY category has been a flat to 1% comp industry and you guys are obviously doing much better than that.

What if anything has changed on the DIY side, outside of the fuel price declines?

And what do you think the rate of the growth in the industry is currently?

Yes.

I think clearly, we are seeing some industry strength currently.

I think a part of that has to do with what's going on with gas prices.

And while gas prices initially went down you didn't see the initial correlation with miles driven increasing.

But in more recent months, starting really strong in the summer and continuing through September, the latest data we have available, it's showing nice strength.

Over long periods of time we've seen that has a nice correlation with our DIY industry growth.

But I also say that our performance I don't think is solely based on industry.

We talked about it in the prepared remarks.

We're also gaining market share.

And I think a lot of these initiatives that we have in place, particularly around inventory availability, are beginning to pay dividends.

And remember, we're just very early in the early innings.

And two quick follow-ups to that.

Who do you think you're taking share from, whether it be on the independent or the national retailers?

And then also with the lower gas prices have you seen any particular lift that you might be able to quantify?

Or if you done any historical correlations, so for instance a 1% increase in miles driven would add 25 basis points to comps?

Yes, I don't think the analysis that we have is that finite.

What I'd tell you is we would think that we're getting a benefit of 1% to 2% at this point in time in our DIY business.

As for who we're gaining market share from, I don't really want to get into that.

I'm more focused on are we gaining market share and what are we going to do to gain more of it?

Okay, great.

And then just last question.

You spoke to still being optimistic about growing sales, and then talked about a dip in trends the last two quarters.

Can you speak to any variability by region that you saw over the last couple weeks?

I think it was 50 here in the Northeast this past weekend and it's supposed to be 60 again this weekend.

Thank you.

Thank you, great question.

Number one, we wanted to call out what happened in the last two weeks of the quarter because it was materially different.

It wasn't materially different this year from the other weeks in the quarter.

What was materially different was last year.

We had that very first significant cold snap, and last year was really significant.

And it happened in the last two weeks of the quarter.

Our sales spiked during those last two weeks.

As we all know, it's been a warm fall.

The beginning of winter is warm so far.

What happens going forward, we don't know.

They're calling for it to be a warmer winter.

We'll see what happens.

And I don't think necessarily when you think about average temperatures, is that really the driver.

What we need are a few really abrupt cold snaps, because the parts that are on the verge of failing will fail when those cold snaps happen.

And we'll get our failure-related business back in those categories.

Our next question is from Mr. Michael Montani with Evercore ISI.

Hi, good morning.

Thanks for taking the question.

Wanted to ask Bill if you could help contextualize a little bit the benefits that you all would have seen in the spring and summer the last two years from what were sort of, I would say, unusually favorable winter conditions, just to help us contextualize that as we head into this coming spring and summer period.

Clearly we said many times over that a harsh winter does benefit us in the spring and summer.

We've never been able to go in and say specifically how much it drives us, but clearly -- and it really happens with the under-car parts.

So what happens with a tough, and particularly a wet, snowy winter, is the roads get a lot of damage.

And that puts a lot of pressure on chassis systems, on brake systems and the like.

And so we do tend to benefit from those as the spring thaw happens and into the early parts of the summer.

Okay, great And just to understand a little bit more, if I could, on the cost side.

I was a little bit surprised to see the 15 bp hit from IMC, just because I thought it would have been cycled, more or less.

So can you discuss a little bit the ins and outs there and how to look at that moving forward, as well as the labor costs which popped up a little bit?

Is that due to increases in terms of pay per hour, do you know, or what's kind of driving that?

Is it hourly rates to drive service, I think you alluded to?

I would say that on the IMC front we haven't fully anniversied it.

We'll anniversary through September -- after September.

But we've also opened five new locations.

So we went from 17 to 22 locations.

So those five locations are adding some incremental expense as they begin to get themselves ramped up.

So my expectation is, is that we would see a little bit of headwind from IMC for the next quarter or so as we begin to mature some of the new openings that we have had.

From a payroll perspective, it's really probably better service levels overall.

I think that we've increased our payroll hours a little bit across the board.

We're not seeing a significant amount of wage inflation yet.

We've seen a little bit.

We anticipate probably a little bit more going forward.

But overall I would say we've improved our service levels in line with our, yes we've got it, initiative.

Thank you.

Our next question is from Mr. Matthew Fassler with Goldman Sachs.

Hi this is [Johnnie Luton] on behalf of Matt Fassler.

Congratulations on a good quarter, guys.

My first question is that some of your competitors called out a benefit from the M&A disruption in the space.

Could you perhaps throw some color as towards you're seeing in terms of those trends, and any impact that you are getting?

Any time somebody goes through a major acquisition integration it's a challenge.

We're not going to get focused on what they are doing.

We're going to focus on what we're doing.

We talked about it in our prepared remarks.

We've got a great strategy.

What's going to matter is whether or not we are able to execute that strategy.

I think we're doing that right now and make sure we continue to do it.

What happens with others is going to happen.

There's nothing we can do to do about it.

So we're just going to focus (technical difficulties).

Got it, okay.

And then my next question is about ALLDATA.

There was some press releases in the last quarter about some new partnerships and agreements that you got for this ALLDATA business of yours.

Could you perhaps talk about these and the potential of this business going forward in general?

Thank you.

Yes, we've got a few partnerships with a few important vendors, and also with customers as well.

And that's pretty much ongoing.

We will continue to grow the ALLDATA business.

We feel good about ALLDATA business.

We think that it's a leader in the industry.

And we had signed an agreement with AMCO, you may have seen, referring to recently to provide them with service through all their locations.

So it's a great product, well respected in the industry and has good prospects going forward.

Great.

Thanks, guys.

Our next question is from Michael Lasser with UBS Securities.

Hi.

This is actually Mark [Heron] on today for Michael.

Thanks for taking the question.

Sure.

So it looks like the gross margin basis point impact from the more frequently delivery initiative picked up slightly this quarter.

Can you guys talk maybe a little bit about what was slightly more costly than expected and what's bringing you up at the high end of your expected range looking forward?

Yes, and that's a very good question and that's spot on.

So we were 37 basis points of deleverage due to supply chain and we had articulated a 25 to 30.

So it was a little bit higher.

I think part of that is really just as we continue to roll out new programs with activity.

If you look at the quarter in a little bit more finite detail, we probably rolled out about 300 programs onto the program this quarter, although we took off a couple of hundred programs that got us to that net 80.

So there was a lot of activity that occurred during the quarter.

And as we began to ramp this up, our handling costs, our internal cost to deliver more frequently will rise a little bit.

And also keep in mind that this quarter and particularly next quarter as well are slightly lower volume quarters.

So we really won't have the opportunity to leverage quite as much as we might during the summer months, so to speak.

So I think overall we feel pretty good about the estimates that we've given on an annualized basis, although on any given quarter they may fluctuate a little bit.

Great.

That's really helpful.

I guess as a follow-up, can you talk about the performance in the stores that have seen that greater delivery frequencies implemented?

And has it been, I guess, consistently higher across the board?

Are you guys seeing some variability?

Yes, it's a great question.

And we do see variability.

And that's the reason why we're going to go forward with a strategy that says roughly two-thirds of our stores are going to see three to five time per week deliveries, and one-third of them are going to continue to see one time a week delivery.

The big variable that drives it, as you would expect, is store volume.

You're talking about replenishment levels.

And the more product that you sell, the more frequently you need to replenish it.

And so we do see significant variability, but it's along the volume scale.

All right, great.

Thanks guys.

Thank you.

Our next question is from Bret Jordan with Jefferies.

Hi.

Good morning, guys.

Good morning.

Quick question on the store level SG&A investment.

I guess if we're looking -- are we thinking about adding employees or maybe changing the mix of employees and getting higher end parts pros as you grow that commercial business?

I wouldn't say it would be changing the mix necessarily.

I think that as the commercial business continues to grow we will continue to invest in commercial sales pros, as you call them, in the organization.

I think really the comparison this year versus last is that we increased our service levels relative to where we were last year.

I think last year we probably cut back a little bit more than we wanted to.

I think actually, we probably might have called that out last year, that we thought our service levels weren't at the level that we wanted them to be.

And so this year we didn't want to repeat that mistake.

So we stuck with our model during the quarter and I think we delivered better service levels.

Okay.

And then follow-up.

The hard part-centric store prototypes, and as you've reset some of the legacy stores, do you see doing more of those, or are you where you need to be from a distribution in the hard parts availability standpoint?

I think as far as resetting some of those stores we talked about, we've got a new store prototype so all the new stores open will be under that prototype.

We've gone back, I can't remember, I think about 126 stores that we've already remodeled on that new store prototype.

And we will continue to do that.

But frankly, I suspect we'll get into the hundreds of stores.

I don't see that being 1000 stores necessarily because we're going to have physical constraints as we go through the process.

But where we can find opportunities to add more hard parts into space-constrained stores, we're going to continue to that.

Is the performance of the hard part of the new prototype store meaningfully different than the legacy mix?

It's different enough for us to justify the investment.

We can debate what meaningful is.

But those stores are performing better and those hard parts are moving.

If I can add onto that.

Number one, the new prototype is not materially more expensive than the old prototype.

So as we open new stores, there's no meaningful cost differential.

The real benefit comes in the really, really space-constrained stores that we have.

Remember, we still have a lot of 3800 square foot stores or 5000 square foot stores.

When those stores are performing at high volumes and we're able to go in and remodel them to the elements of this new prototype, that's where we can really see a differential.

Great, thank you.

Thank you.

Our next question is from Mr. Curtis Nagle with Banc of America Merrill Lynch.

Thanks very much.

And just on for Denise Chai today.

So two quick questions.

One, it looks like the comp total sales variance narrowed a bit from recent trends.

Just curious if that's from the peso or something else?

And then two, any commentary on new store growth for this year, if you could comment on that?

Sure.

Great questions.

First of all on the peso, our same-store sales are domestic only.

So the peso variances aren't impacting our same-store sales at all.

If you look at last quarter our same-store sales did 4.5%.

They did 3.5% in Q1 of 2016.

You can almost point directly to the last two weeks' performance as to why that's different.

And as we mentioned in the prepared remarks, we went up against the polar vortex last year in those two weeks, and we had phenomenal weeks.

This year we had good weeks but they were up against phenomenal weeks.

And that's basically the differential in our same-store sales for the quarter.

And then just any commentary on new store growth, if you could?

We plan to open -- we opened 158 stores last year, I believe it was, 157.

We plan to open about 150 stores this year on a domestic basis.

We're looking to grow Mexico around 40 stores and Brazil, we're kind of taking them one at a time.

Okay.

Thanks very much.

Thank you.

Our next question is from Mr. Tony Cristello with BB&T Capital Markets.

Thank you.

Good morning.

Good morning.

The first question I had was with relative to the IMC, the import business.

I think you said you had 22 locations and those were able to service about 600 stores.

Can you talk about how that business has evolved, how important that is relative to the future growth and where you'd like to see that business in terms of touch points relative to your existing store base?

It's a great question.

All right.

So a couple of things.

Number one, when we acquired IMC just over a year ago they had 17 branches.

We've now open five new branches.

We stand at 22 open locations.

Those IMC branches are servicing 600 AutoZone stores, but that's not a function of how many branches we have.

That's a function on some short-term system limitations that we have at AutoZone to be able to serve up that catalog in our AutoZone stores.

We're working -- we did some short-term solutions that have allowed us to get into those 600 stores so we can test it.

Now we are having to go back and do the more robust work to industrialize those system improvements.

That will be coming later in the year, which will allow us to expand how IMC services the AutoZone stores.

I want to also be careful to not overstate the implications of IMC servicing AutoZone stores.

Yes, we will leverage IMC.

But that's not going to be the big driver of our commercial business.

The reason, the main primary reason we bought IMC is because we think IMC in and of itself is a good business and we will continue to expand that business, as we've shown with the five stores that we've opened to date.

Is that a business that can double or triple?

I'm just trying to understand, it's a great business and the import side of the business is going to continue to grow, given the car park and how that's evolving.

Yes, if you take a look at the industry leader in the import side of the business, they've got well over 100 locations.

But I don't see why we can't do the same over time.

Okay.

And if I could have just one follow-up on sort of another business that can contribute.

The ALLDATA side, and I know you've talked about wins and such, but how much of that business do you get sort of a lead into where you should be structuring your commercial side and what parts you need to be carrying?

Because I guess that's a system that's in place with your installer base and probably developing relationships before you may have some of those well established relationships at a store level?

There is some of that.

There is an ability for us to be able to extract some information.

I think that we still have a lot of work to do relative to acquiring more information out of all of that in order to improve some of the synergies across our commercial business as well.

So I would categorize it as it, is helpful on identifying certain trends.

But we still have a long way to go in doing that.

Okay.

Thank you for your time.

Thank you.

Our last question is from Mr. Seth Basham with Wedbush Securities.

Thanks a lot, and good morning.

Good morning.

My question is around mega hubs.

It sounds like you're having some good success in rolling out mega hubs and getting lifts from the stores they are servicing.

Can you provide any more detail on what kind of cycle lift you're seeing specifically out of those stores from mega hubs?

No, we haven't gone into the specific distinctions between inventory delivery frequency and mega hubs.

What we continue to say is that you have both of the programs.

They are going to add between $1000 and $1500.

Now, that also varies because some of the mega hubs are -- the stores that are serviced by that mega hub are serviced by them three times a day directly, while other stores are serviced by other hub stores that get deliveries three times a day and then other hub stores get overnight deliveries.

So there's quite a bit of variability in it.

But we continue to be pretty comfortable saying if you get frequency of delivery and mega hubs, it means about $1000 to $1500 per store.

Got you.

And in terms of your growth pace of mega hubs, you've talked to around 25 to 30 over the next two years.

What's the limiting factor in slowing that rollout if you're having pretty good success with the ones you already have out there?

It's just as simple as, number one, we wanted to go test this program until we got five up and running.

We made the decision in the late summer/early September to move forward with this strategy.

Now it's a function of the real estate development pipeline.

And remember, I mean, even for a regular AutoZone store it can take us two years to get a store open.

So it has nothing to do with anything other than our real estate pipeline and how long it's going to take us to do that.

Trust me, we are pushing very hard on that front.

All right.

That's good to hear.

And lastly, not to spend too much more time on the weather, but I just wanted to understand, since the weather was unfavorable at the end of the quarter, how is your business progressing through the fiscal second quarter?

Yes, everybody always wants us to talk about that, and we stay away from that.

Unlike a lot of organizations that will have their conference call four to six weeks after their end of the quarter, it's only been two week and two days.

So I think that it's not a good prudent strategy for us to talk about what's happened in the first couple of weeks.

And we've been consistent about that for a long time.

So I don't want to break that.

Now, I will say this.

Weather normalizes over time.

And I also want to reiterate that a really cold winter is great, but what we really look for is just a few good, hard cold snaps.

And that's when we really see big spikes in our business in certain failure-related categories.

Got it.

Well, (technical difficulties) and good luck.

Okay.

Thank you very much.

At this time I would like to hand the call back to you, Mr. Bill Rhodes.

Thank you.

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

We are excited about our growth prospects for the year.

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

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

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

We thank you for participating in today's call.

And we would like to wish everyone a very happy and healthy safe holiday season and a prosperous New Year.

Thank you very much.

And that concludes today's conference.

Thank you all for joining.

You may now disconnect.