汽車地帶 (AZO) 2016 Q4 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

(Operator Instructions)

Please be advised that today's call is being recorded.

If you have any objections please disconnect at this time.

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

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

The conference call will end promptly at 10 AM Central Time, 11 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 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 the prospect of war including terrorists 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 the risk factor section contained in item 1A under part 1 of this Annual Report on Form 10-K 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 decision 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 any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual results may materially differ from anticipated results.

Now I'll turn the meeting over to your host, Mr. Bill Rhodes.

Sir, you may begin.

Good morning and thank you for joining us today for AutoZone's 2016 fourth-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 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.

2016 was a very busy and productive year for us.

We continued growing our business on many fronts.

Our US retail business expanded again in 2016 with the opening of another 156 new stores.

Our commercial business continues to gain traction growing sales 7.1% for the year with 249 net new programs opened.

We now have the commercial program in 83% of our domestic stores, having opened 969 net new programs in just the past three years.

And we continue to expand our presence in Mexico.

This quarter we celebrated the opening of our 483rd store.

We didn't open any additional stores in Brazil this quarter and opened 1 for the year, ending the year with 8 stores in operation.

Lastly, we opened 6 new IMC branches during the year, with 1 opening in the fourth quarter.

We continue to see significant opportunities to open new stores and commercial programs in all of the geographies where we operate.

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

While the domestic business dominates our sales mix and continues to be our primary focus, we believe we have great growth opportunities outside the US for many years to come.

I would expect the international mix of our business to only grow from here.

In 2016 we expanded our online offerings in both our traditional AutoZone.com and AutoZonepro.com website, as well as on AutoAnything.

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

DIY operations remains our number one priority.

Our DIY business continues to grow and remains the largest portion of our sales.

Also, DIY continues to generate tremendous returns.

We continue to see opportunities for new store growth and improved productivity in our existing stores, which positions us well in this business for years to come.

As our commercial business continues to grow and is intertwined with our retail business, we have continued with our inventory placement and distribution initiatives in order to respond to the ever increasing challenge of parts proliferation in the industry.

This past year we opened 6 additional hub locations and expanded our mega hub count to 11, increasing by 6 for the year.

We've also continued to expand our multiple frequency of deliveries from our DCs to over 1,900 stores.

And we are continuing with our new distribution center strategy with an expectation of having two new domestic DCs open over the next three years.

Our current expectations are for the first facility to come on line in late FY17 or early 2018 while the other will open 6 to 12 months later.

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

To this end, our national sales meeting in Memphis next week will be entirely focused on providing WOW!

Customer Service while focusing on saying -- Yes, we've got it -- to all of our customers' parts, products and advice needs.

Like everything at AutoZone, our pledge starts with putting customers first.

And we will continue to stress the importance of going the extra mile to fulfill our customers' needs regardless of how difficult the request.

Last year we made the Yes, We've Got It theme a key priority.

For 2016, we focused on literally getting the merchandise SKUs into our network of DCs, mega hubs, hubs and stores.

This year is different and requires a different message because we have more ways to solve our customers' desires than ever before.

This year is about ensuring our store AutoZoners are able to utilize the significantly enhanced availability and close the sale.

It is also surprising and disappointing to see how many customers leave our stores every day, not having completed their intended purchase because we didn't have or couldn't find what they needed within our network.

In this spirit, to help the customer, we are making ongoing significant systems enhancements to capture data about our customers' shopping patterns across all of our platforms.

We understand we have to be able to share information and process seamlessly 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 initiatives.

These are two very discrete and different strategies addressing different opportunities.

Multiple frequency of delivery is solely focused on improving the in-stock levels for the SKUs that are stocked in our stores.

And the mega hubs are focused on adding additional coverage to the local markets, meaning adding SKUs that would not have been available before.

We tested these two enhancements for a couple years before beginning our implementation.

In our test, when combined, the initiatives were increasing sales between $1,000 and $1,500 per store per week.

It is easier to evaluate the mega hub success because we would have had to order these parts through our special order system or bought them from someone else historically.

The multiple frequency of deliveries initiative is more difficult to evaluate because we have transferred the merchandise from a different store or sent the customer to a different store.

We've been very pleased with the implementation of both of these initiatives to date but we are still working on methods to quantify their exact benefits, as it is not lost on us that it's hard to see the benefits showing up in our 1% domestic same-store sales increase.

However, we are confident that we are providing better customer service and our in-stock positions are noticeably higher.

Additionally, as is our custom, we are studying our performance on various elements, and as we complete these reviews we are optimistic we will find optimization opportunities to enhance our performance even further.

Regarding multiple frequency of deliveries, we've implemented this enhanced service in roughly 1,000 additional stores during FY16 and now have over 1,900 of our nearly 5,300 domestic stores receiving deliveries, from their distribution center at least three times per week.

Some stores receive more weekly deliveries than three but weekly volumes determine need as the sales lift from delivering to every store every day can't justify the higher expense.

Therefore, we've settled on a more staggered approach.

I should emphasize, this was up from the usual once a week delivery schedules we've historically run.

With approximately 23,000 SKUs in an average AutoZone store our inventory turns at a relatively low rate, around 1.4 times per year.

The vast majority of our SKUs have an on hand quantity of one.

Therefore, given the randomness of demand, there is potential for out of stocks.

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 roughly an additional 1,000 stores.

We are targeting to have around 3,000 stores receiving this level of service by the end of FY17.

We continue to model 15 to 20 basis points of gross margin headwind from this initiative in 2017.

The second ongoing initiative is the mega hub store concept.

With 11 now open, we'll open and/or expand another handful of mega hubs stores in 2017.

We are very excited about what the mega hubs allow us to offer our customers.

As a reminder, these supersized AutoZone stores carry 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 continue to exceed our expectations.

At the end of the year, we had over 3,000 stores with access to mega hub inventory.

Now, not all of these 3,000 stores were having mega hub SKUs delivered same day.

A majority of these stores received overnight deliveries from mega hub locations and will continue until we open more mega hubs.

We expect to ultimately operate 25 to 40 mega hubs once the implementation is complete.

While there was incremental cost to these rollouts in payroll and fuel to manage the extra deliveries to surrounding stores, we continue to feel these investments will provide a better customer experience and increased market share.

Our assumption for this rollout is that we won't experience meaningful deleverage from this initiative in FY17.

In order to support more frequent deliveries to new stores as well as the mega hubs, we are moving forward on our planned openings of two domestic distribution centers over the next few years.

For your modeling purposes, each new distribution center is expected to cost approximately $60 million, and those expenses began to flow in a small way in our CapEx spend in 2016.

2017 will have a more substantial amount of the spending.

We don't expect any distribution center to come on line until late FY17 or early 2018.

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

Our sales increased 3.3%.

Our domestic same-store sales were up 1%.

This quarter sales results were stronger at the end of the quarter.

While every month had positive comp performance, it was clear to us that the lingering effects of last year's mild winter hampered our growth, especially in the Northeast, Midwest and Mid-Atlantic Markets.

This is similar to 2012 when we also experienced a mild winter.

We highlighted on last quarter's call our belief that a hot summer could offset the mild winter.

Clearly, later in the quarter, the heat helped as our heat-related categories performed well for the quarter, but we weren't able to completely offset the mild winter's effects.

Last year we mentioned a roughly 500 basis point spread in comp store results between the Northeast, Midwestern, Mid-Atlantic Markets and the rest of the chain.

While it was less than 500 basis points this quarter it was still over 400 basis points.

At the end of the quarter, the spread tightened a bit.

However, our expectation is that this overhang will persist until we get a robust winter weather pattern again.

In regard to our three primary merchandise categories -- failure, maintenance and discretionary merchandise -- we didn't experience any significant divergence of trends.

Failure and maintenance for AutoZone represented approximately 85% of our domestic business.

This was usual for this time of year.

Again, all categories were positive but their performance was significantly different based on regionality.

While our ticket was positive for DIY and commercial, we saw traffic slightly negative for our DIY business.

Again, regional performance played a key role in this result.

We opened 116 net new commercial programs in the quarter versus 134 programs last year.

For the year, we opened 249 net programs reaching 83% of our domestic store base.

While our sales grew 7.1% on the year in commercial our programs opened grew by 6%.

As our programs mature we believe our sales potential remains strong.

As part of our strategy of increasing inventory levels in local markets we opened four mega hub locations during the quarter.

Over time we expect to open more hubs and mega hubs in order to provide more inventory closer to our customers.

Regarding Mexico, we opened 25 stores this quarter and now have 483 total stores.

In local currency, Mexico experienced a strong year.

However, Mexico's sales in US dollars were below historic growth rates given the roughly 9% decrease in the value of the peso to the US dollar based on fiscal year-end rates.

Additionally, we are in the final stages of building our second distribution center in Mexico, and it is scheduled to begin servicing stores in the first quarter of 2017.

Sales in our other businesses for the quarter were up 4.3% over last year.

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

While we are excited about our online sales opportunities and growth potential, we believe expectations for our space to experience growth like in other merchandise categories is not likely.

We recognize the majority of our site traffic is providing information to our customers prior to purchase.

And our eCommerce platform represents an important part of our omnichannel experience.

We see customers doing lots of research to learn about the products and how to do their repairs.

While these businesses are small for us at less than 5% of our total sales mix for the quarter, the omnichannel experience is important, and we will continue to invest in our eCommerce platform.

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 unit 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.

Regarding our expectations for 2017, our first- and second-quarter results are more difficult comparisons.

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

While having underperformed in the Northeast, Midwest and Mid-Atlantic during the winter and beyond this past year, we believe we should improve in these regions.

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

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 40 consecutive quarters of double-digit EPS growth.

However, with our delivery frequency initiative, our expanding mega hubs and the opening of new DCs, we will likely have some headwinds on our operating margin.

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

The key priorities for the year were, one, great people providing great service; two, profitably growing our commercial business; three, leveraging the internet; four, improving inventory availability; and, five, Yes, We've Got It.

On the retail front this past quarter, under the Great People Providing Great Service theme, we continued with our intense focus on improving execution.

While we have been adding store payroll this year, we are now enhancing our training to store level AutoZoners, increasing the share of voice regarding availability with the Yes We've Got It theme.

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

In regards to commercial, we opened 116 net new programs during the quarter.

For the year we opened 249 net new programs versus 296 last year.

Our expectation is we will continue to open new programs in the range of 200 to 250 programs in 2017.

While our commercial sales results were below our expectations this year, the entire industry sales were below our expectations.

In previous years we saw the commercial business grow for our industry in the low to mid single-digit range, while we grew at double digits.

It appears to us the industry, predominantly from the impact of a mild winter in the northern part of the country, grew at a much slower rate in 2016.

While our sales growth rate slowed versus last year's pace, the industry saw a similar slowdown in growth.

Our data shows we again saw our sales gaining share this past quarter.

Regional discrepancies played a big role in commercial as well as retail.

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 making additional resources, 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 2016 at 31.3%.

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

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

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

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

2016 was not an easy year.

While our industry's performance was volatile we asked our organization to accomplish a tremendous amount.

Even with our ongoing supply chain initiatives, as well as new store openings, we were ready to continue to provide WOW!

Customer Service to all of our customers.

2017 will be no different.

We are looking forward to an even better 2017 because of our AutoZoners' efforts in 2016.

Now I'll turn the call over to Bill Giles.

Bill?

Thanks, Bill, and good morning, everyone.

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

For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores, and our 26 IMC branches, increased 3.3%.

Let me touch on domestic macro trends for a second.

During the quarter, nationally unleaded gas prices started out at $2.22 a gallon and ended the quarter at $2.24 a gallon, a $0.02 increase.

Last year gas prices decreased $0.18 per gallon during the fourth quarter, starting at $2.69 and ending at $2.51 a gallon.

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

And as cost reductions help all Americans we hope to 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% in May and 3.2% in June.

We don't have July or August data yet but year to date through June miles driven were up 3.3% and ahead of last year's increase at this time.

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 52 weeks ended, total sales for AutoZone store were $1.773 million.

For the quarter, total commercial sales increased 5.2%.

In the fourth quarter commercial represented 19% of our total sales and grew $32 million over last year's Q4.

This past quarter we opened 116 net new programs versus 134 programs opened in our fourth quarter of last fiscal year.

We now have our commercial program in 4,390 stores supported by 182 hub stores.

Approximately 1,000 of our programs are three years old or younger.

It's important to highlight that we accelerated our new program growth over the past few years as approximately 22% of our programs are younger than three years old.

However, we focused on a more deliberate opening schedule starting this past year.

We feel openings in the range of 200 to 250 is more realistic for future growth.

Not only is it easier to hire and staff but it also allows us the ability to devote resources to our existing programs.

During FY16, our sales growth in commercial decelerated.

Some but certainly not all of the deceleration was due to a fewer new programs going through the maturation cycle.

Our growth was also negatively impacted by what we perceive to be an overall industry slowdown in commercial, particularly in the Northeast, Midwest, and Mid-Atlantic Markets.

As we exited 2016, our trends had accelerated modestly, which is encouraging to us.

We're very focused on having a great sales team and having much stronger engagement of our store management teams, particularly the store managers and district managers.

We remain confident that we will continue to gain market share with our commercial customers.

I complete my comments here by saying we feel 2017 should be a better sales growth year than 2016.

This belief is based on all of the initiatives we have in place.

Our Mexico stores continue to perform well.

We opened 25 new stores during the fourth quarter and 42 for the full year.

We currently have 483 stores in Mexico.

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

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

As Bill said earlier, we were challenged by a difficult foreign exchange rate in regard to the peso.

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

The peso devalued over the course of the year.

This created a head wind that caused our reported US dollar EBIT to be lower than if rates had remained constant.

EBIT dollar impact on the quarter assuming constant currency with last year's foreign exchange rate was meaningful, it was $10 million impact to EBIT.

We feel the Mexico leadership team did an exceptional job managing the peso-denominated business.

Regarding Brazil, we currently are operating 8 stores.

Our plans are to open between 15 and 20 stores over the next few years.

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

Recapping this past quarter's performance for the Company, in total our sales were $3.399 billion, an increase of 3.3% over last year's fourth quarter.

Domestic same-store sales or sales for stores open more than one year were up 1% for the quarter.

Gross margin for the quarter was 52.8% of sales, up 30 basis points.

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

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 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 target gross margin percentage.

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

We 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 32.1% of sales, lower by 5 basis points from last year's fourth quarter.

SG&A as a percent of sales benefited from a favorable comparison to last year's higher legal costs, which was partially offset by our continued investment in store payroll.

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

EBIT for the quarter was $703 million, up 5.1% over last year's fourth quarter.

Our EBIT margin was 20.7%.

Interest expense for the quarter was $45.8 million compared with $47.1 million in Q4 a year ago.

Debt outstanding at the end of the quarter was $4.924 billion, or approximately $300 million more than last year's balance of $4.625 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 35.1% versus last year's Q4 of 35.5%.

The deviation in results is primarily driven by the resolution of discrete tax items that arose.

Net income for the quarter was $427 million, up 6.4% over last year.

Our diluted share count of 29.8 million was down 5.2% from last year's fourth quarter.

The combination of these factors drove earnings per share for the quarter to $14.30, up 12.2% over the prior year's fourth quarter.

Relating to the cash flow statement for the fourth fiscal quarter, we generated $530 million of operating cash flow.

Net fixed assets were up 6.5% versus last year.

Capital Expenditures for the quarter totaled $189 million and reflected the additional expenditures required to open 99 new locations this quarter, along with capital expenditures on existing stores, hubs, and mega hub store remodels or openings, work on the development of our new stores for upcoming quarters, and development of our New Mexico DC.

Some investments in our new domestic DC is in information technology investments.

For all of FY16 our CapEx was approximately $489 million.

With the new stores opened, we finished this past quarter with 5,297 stores in 50 states, the District of Columbia and Puerto Rico, 483 stores in Mexico, and 8 in Brazil, for a total AutoZone store count of 5,788.

We also had 26 IMC branches open at fiscal year end, taking our total locations to 5,814.

Depreciation totaled $94 million for the quarter versus last year's fourth quarter expense of $87 million, in line with recent quarter growth rates.

With our excess cash flow we repurchased $370 million of AutoZone stock in the fourth quarter.

At year-end we had $395 million remaining under our share buyback authorization and our leverage metric was 2.5 times at year end.

Additionally this morning we increased our authorization an additional $750 million, taking our total authorization outstanding to $1.145 billion.

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 gross inventory finished the quarter at 112.8%.

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

The Company's inventory increased 6.1% over the same period last year, driven primarily by new stores during the fiscal year.

Inventory per location was $625,000 versus $610,000 last year and $629,000 just last quarter.

Net inventory, defined as merchandise inventory less accounts payable on a per location basis, was a negative $80,000 versus a negative $79,000 last year and a negative $69,000 this past quarter.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.3%.

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

Now, I'll turn it back to Bill Rhodes.

Thank you, Bill.

We are pleased to report our 40th consecutive quarter of double-digit EPS growth, and for the year to report an EPS growth rate of 13%.

We are also quite pleased with all we accomplished during 2016.

While we experienced more regional sales differences than either planned or usual, our Company executed exceptionally well.

Our focus remains on being successful over the long run.

That success will be attributable to our approach to 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.

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 FY16.

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 $10.6 billion this past year and we grew same-store sales at 2.4%.

And we continued with our double-digit EPS growth streak, reaching our 40th consecutive quarter.

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

We continued with our IMC integration, opened 6 new branches and now have 26 in total.

Our inventory availability rollout continued on plan.

I could not be more proud of the tremendous work everyone on these projects contributed.

And, lastly, we are talking more -- more about saying -- Yes, we've got it -- to our customers.

We are determined to meet all our customers' needs in 2017.

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 our sales.

With 2016 behind us now, we must remain committed to delivering on our strategic and financial objectives.

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

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

We are launching our Yes We've Got It theme.

And I know our leaders, combined with our talented team of more than 84,000 AutoZoners, will do a fantastic job in 2017.

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

(Operator Instructions)

Our first question will be from Mr. Alan Rifkin of BTIG.

Thank you very much.

My first question has to do with commercial.

As you continue to expand the MFD program as well as the hubs and the mega hubs, and I realize that certainly you are earlier in the program among some versus others, but as you assess the expenses associated with each of these initiatives and the potential benefits, how would you rank order where, between the three of these initiatives, you think can be most profitable to you down the road?

Help me with the three.

Are you talking about multiple frequency of delivery, mega hubs and, what was the third one, Alan?

And hub stores, Bill.

Yes, I would say hub stores are pretty much baked in the cake at this point in time.

We'll open a few more.

They've been a great addition to our strategy and we will continue to leverage them long term.

Always looking for more opportunities to leverage them further.

As I said in our prepared remarks, the mega hubs continue to outperform our expectations.

They're doing really, really well.

We've got 11 of them now and we'll hopefully open more than a handful this year and are proceeding very well with that.

That one is much easier to measure and quantify the results.

Multiple frequency delivery, because you're talking about the randomness of demand, it's a little bit harder to evaluate that.

In our test stores we felt very good about it.

We're just trying to go back now and validate it.

But I would say the mega hubs are outperforming at this point in time and we're continuing to try to refine both multiple frequency of delivery and mega hubs.

Okay, thank you.

And my follow-up, if I may, it was mentioned during the call that the trends accelerated as the quarter ended.

I was wondering if maybe you could provide a little bit of color on the performance within the quarter of the weather impacted versus non-weather impacted markets, or discretionary versus non-discretionary items, just to give a little bit more clarity around what drove the comp.

Thanks.

Yes, clearly, the quarter started softer than it ended.

I don't want to overstate that.

These were modest improvements that built throughout the quarter.

As you know, it got much hotter around July 1. And as we said on the last call, heat's going to help us in the summertime, and it certainly did.

We saw those benefits across the board in those heat-related categories.

And, yes, we saw the weather-impacted regions improve modestly.

But I think, as we said before, we think that is going to have a lingering effect until we get into a more normalized winter.

Okay, thank you very much.

Our next question will be from Mr. Seth Sigman of Credit Suisse.

Thanks, good morning, guys.

Just to follow-up on that last question, is it fair to assume that the gap between the stronger and weaker markets has continued to narrow here in the first quarter, even if just modestly?

We've got a standing practice.

We announce our earnings so early in the quarter that we really don't want to get into this quarter's results.

We're three weeks in and things can just happen in three-week periods.

So, I don't ever want to talk about what's happened in the current quarter.

I'm sorry.

Understood.

Maybe just asked a different way, is it your sense that the gap has really just been weather or could there be something else going on, either from a consumer perspective or competitive perspective?

And on the consumer side, I think some of the regions that you've highlighted have also been highlighted by some other companies, even in different sectors.

So, just wondering your thoughts on that.

For us, I don't think the health of the consumer is really that significant of a driver.

If you turn back the clock to 2009, 2010 and 2011 when everybody was really struggling, we performed exceptionally well.

So, I don't think we are a good barometer of the consumer and the consumer's health.

I think the biggest differentiator for us has been the weather that happened in those parts of the country.

We saw it back in 2012.

We've gone back and studied it now.

That's why we're saying we think the effects will linger until we get into a good strong winter again.

Okay, thanks for that.

And my follow-up question is on the online business.

You mentioned it a couple times on the call.

Can you talk a little bit about the expanded offerings that you mentioned, and also some of the investments that you alluded to?

And ultimately do you expect to be spending more on online as we look out over the next year versus what we just saw?

Thanks.

I think we'll continue to spend a little bit more on our eCommerce platforms, particularly on AutoZone.com because, although our volumes may not be significant from an eCommerce perspective, we have a lot of eyeballs coming to our site to learn more about our products, our availability, maybe even get some repair information, et cetera.

And we believe that traffic migrates itself to the stores and winds up resulting in a purchase.

From an omnichannel perspective our eCommerce platform is very important relative to providing a complete WOW!

customer experience for our customers in terms of learning about the products, understanding the location of the stores, pricing, et cetera, and then transferring that to the stores and then executing the transaction.

We also make it easy for our customers to do buy online and pick up at store.

So, we're trying to be able to provide great service to the customers in any form that they want to be able to shop in.

We think eCommerce is an important element of that and we'll continue to invest in it.

Okay, thank you.

Thank you.

The next question will be from Michael Lasser of UBS.

Good morning.

Thanks a lot for taking my question.

Presumably, given your comp in the quarter, you're not seeing the $1,000 to $1,500 of incremental sales from all the initiatives you've put in place.

So, why do you think you're not seeing that as you expand the availability of those initiatives?

I'm not sure I'm prepared to say that we're not seeing it or whether or not there's something else.

As I mentioned, there was a 400 basis point impact in the comp.

One of the things is a lot of the multiple frequency of delivery work has been done in those weather-impacted regions, so maybe it would have been more pronounced without it.

What we're saying is -- look, we hear you loud and clear, we don't see it showing up in the 1% comp but it might be something else.

We're going back to the drawing board and reassessing everything we can to make sure we optimize those resources.

At the end of the day we know we're improving customer service and we know our in stocks are up materially.

That has to ultimately help our business.

And, Bill, on the whole online discussion, can you give us a sense of what your customer base on the DIY side breaks down between heavy DIYers and more casual DIYers, and how much of a sales assisted nature each transaction involves so we can scope out what the potential risk is if this category does move online?

I think that from an online perspective, we're seeing it mostly in somewhat non-discretionary purchases as far as traffic is concerned and where it's going, et cetera.

But I think also, the way we think about online a little bit is that there will always be an element of transactions that are going to occur online, but, from our perspective, we provide trustworthy advice at the counter for the customer.

We also provide an ability for us maybe to replace wiper blades or install batteries, et cetera.

So, there's a service element that takes place at the store, as well.

So, there's a value proposition that takes place in the store that's different than anything you're going to receive online.

You've got somebody you can talk to.

You've got information, repair information, that can be printed out and provided to you.

You've got somebody who can walk out to your car and look at it and help you assess what it is you want to accomplish.

In addition to that, there's cores attached to many of the products that we sell, which create a two way transaction.

So, there's all sorts of elements that, from our perspective, we provide a great value proposition.

And I know there's a discrepancy in the pricing that you're going to see online versus what you get in the stores, and that's all part of the equation.

So, we think from a long-term perspective that we'll be cognizant of those price discrepancies but we'll also make sure that we continue to add a value proposition that warrants it.

Maybe I could just ask the question differently.

What percentage of your DIY sales come from customers who spend more than $500 a year with you?

It would be exceptionally low.

Okay.

Thank you so much.

Thank you.

Our next question will be from Mr. Simeon Gutman of Morgan Stanley.

Good morning, guys.

First question on the commercial sales program, Bill.

You mentioned you're looking backwards or looking at all options to try to figure out how to optimize it.

What's your sense on the investments that you're making, the ones that are in place, are these things that will take time to get more traction?

Or do you think that somehow you have to put more money or put more dollars or CapEx or more SG&A into it to drive the commercial growth?

I think that it's something that has to mature over time.

These are relationships built with customers over long periods of time.

And because you enhance your availability, either from an in-stock position or from an expanded parts assortment, they're not necessarily going to switch to you over time.

Particularly on the expanded parts assortment, when they're calling around and they find that you do have that product, that's going to help you move up that call list.

But it's not going to happen overnight.

Okay.

And then maybe for Bill Giles, when you initially talked about the rollout of more frequent delivery, we dimensionalized the cost.

I think it was 20, 30 basis points or so a year.

I'm not sure that included the rollout of DCs.

So, next year we talked about the DCs starting to come into the picture.

Does that mean the EBIT margin starts to get inhibited?

I know you reiterated the earnings growth algorithm and it sounds pretty typical but I'm curious what happens at the line with margin.

Could we see margins flat or, if not, maybe down in this investment scenario?

I think the MFD, like we said, like you articulated, was a 20, 25 basis point impact on gross margin.

When we roll out the distribution centers, just by the geographic nature of where they get rolled out, our anticipation is that some of the transportation cost savings will wind up offsetting a big chunk of that.

So, there may be a little bit of deleverage from a startup perspective, but on an ongoing perspective we would not expect the new distribution centers to really deleverage gross margin in any meaningful way.

Okay, thanks.

Thank you.

Our next question will be from Ms. Kate McShane of Citigroup.

Thank you for taking my question.

A couple of questions on commercial, also, from me.

You had mentioned that commercial had been growing in the low to mid single-digit range for the industry.

Can you tell us how much you think the industry grew this year?

And then second to that, can you walk us through how you think about the maturation of programs weighing on your comp versus the market share gains you mentioned for commercial?

Let me get into the first one.

We don't have the exact numbers of what happened in the commercial industry.

From what we've seen from watching our competitors and some of our public customers, and what we've seen, we think it probably slowed 200 to 400 basis points year over year.

That's not a very finite number but we've certainly seen virtually everybody show a deceleration in their growth, particularly in the second half of our year.

I'm sorry, what was the second part of your question?

You quantified some of the impact from weather but I just was more curious about any magnitude with regards to your commentary around the maturation of programs, which I know you've mentioned before, versus the market share gain you think you gained in commercial during the year.

The deceleration of our program growth -- and it wasn't just this year, it's really what's happened over the last three or four years -- if we quantify that it's about 300 basis points of a deceleration in our commercial growth.

Okay, great.

And just a nuanced question but I'm curious why the mild winter can still impact your business before the actual winter hit.

Is there still repairs from a severe winter happening in the months of June and July?

And how much of that is the percentage of your business that's during those months?

It absolutely impacts it going forward.

And we can go and look at specific markets and see it crystal clear in their performance in certain categories.

One of the things that happens in the wintertime in those regions is the snow and ice, either we have put salt down to take care of it or there's snow piles that are tearing up the roads.

That puts pressure on the under car parts -- think about chassis and the like.

And, also, the salt makes things rust.

They don't just rust that day, they rust over time, and those rusted parts have to be replaced over time.

So, we are very confident that we understand what the weather implications are.

And we're also very confident that they last until we get to another big winter cycle.

Thank you.

Thank you.

Our next question will be from Mr. Chris Bottiglieri of Wolfe Research.

Hi, great, thanks for taking my questions.

First one I had was, it seems like you're hedging a little bit in terms of the -- and I could be wrong here -- but it seems in terms of the daily delivery and ultimately the work.

I'm just trying to understand, in that core 20,000 SKUs, realistically, how many of those need to be replaced more than once a week?

Is there some other median between the mega hub and DCs that you could do to maybe service those SKUs?

And, lastly, if you decide that mega hub is the solution and daily delivery more than once or 2x a week isn't the solution, would you consider expanding the rollout of those mega hubs?

We are going as fast as we can go on the mega hubs.

Nothing is holding us back, not capital, not operating expenses.

We want to go as fast as we can go.

The challenge of that is they're real estate projects, and real estate projects can easily take two years from the time you initiate them until the time you're completed.

These are even more complex than our regular projects.

So, I don't think it would have any bearing on where we are with the mega hub rollout.

Where I would characterize multiple frequency of delivery is we are trying to find the benefits in the numbers, and it's a little bit more difficult than we would like.

We knew that going in.

It was more difficult in the test, as well.

We also are looking at it at a more granular level and are trying to find some opportunities, and are seeing some interesting things where we might have had some unintended consequences that we can reverse and improve on.

All we're saying is we get it that it's hard to say.

We've seen a $1,000 to $1,500 per store and a 1% comp.

That's not lost on us and we're going back to work to make sure we can find it.

Okay, that's great.

And then just one unrelated follow-up.

Can you talk about ticket drivers across the industry right now, to the best you're able to?

Are like-for-like SKUs still deflationary?

What about part complexity?

How much of it gets added to average selling prices, if you were to maybe attempt to quantify that?

I think on the part complexity there's probably a natural inflation rate that occurs from a technology perspective that we've seen over time and continue to see.

So, that helps a little bit from an inflationary perspective.

On a commodity or a cost basis, we've seen very little inflation.

In fact, in some cases, deflation.

So, from that perspective on an average transaction value, we would say that we've seen little benefit, and possibly a slight deterioration, from commodity-based prices.

And then that's been offset by some enhancement or increase, if you will, from technology inflation that always exists.

So, actually, when you think about it over the last three years, our comp store sales -- same with the industry -- has probably not been helped by inflation.

Inflation usually can be a help in terms of same-store sales and that just hasn't existed over the last couple of years.

Got you.

Okay, makes a lot of sense.

Thanks again for your time.

Appreciate it.

Thank you.

Next question will be from Mr. Seth Basham of Wedbush.

Thanks a lot and good morning.

My question is around the lift you guys have gotten from the two initiatives, frequency of delivery and mega hubs.

Of the $1,000 to $1,500 per week lift that you're experiencing, how much can you attribute to frequency of delivery versus mega hubs?

We really haven't quantified it because it's so hard to quantify.

But a little bit more than half would be from the multiple frequency of deliveries, and the balance from mega hubs on a per store basis when it's rolled out.

Got it.

That's helpful.

Okay.

And then, secondly, I was just hoping you could give us a little bit more perspective on the comp trend through the quarter.

Not to beat a dead horse here, but as you think about the weakness earlier in the quarter and the strength at the end, was August, in fact, stronger from a comp trend perspective than July?

Yes.

Great.

Thank you very much.

Thank you.

Next question is from Mr. Matthew Fassler of Goldman Sachs.

Thanks a lot and good morning to you.

I want to follow-up on a couple of comments you made online.

First of all, I realize that online is less than 5% of your business but can you give us a sense of the growth rate that you've experienced there, particularly within AutoZone, and you can think about it on a full-year basis?

I'd say on AutoZone it's going to grow at a faster rate slightly than the retail business.

But you're right, Matt, it is less than a 5% business.

It's growing a little bit.

But our emphasis and focus on AutoZone.com is about providing customers with information, because, in more cases than not, they're executing that transaction in the store, either through a buy online/pick up in store or a visit to the store after they have visited the website.

So, we will continue to execute commerce on our website and we'll continue to make it a better site in order to do that.

But the real emphasis is creating that whole omnichannel experience for the customer between getting online, getting information and getting to the stores.

And if I can ask a follow-up on that, you talked about the expertise of the parts pros behind the counter and you also talked about AutoAnything.

If you go to the AutoAnything site, it leads right at the top with a live chat option and really stresses the presence of phone experts.

And I realize that at AutoZone you certainly have that in the store.

Are you considering bringing some of that functionality, some of those features to the AutoZone site to make the brand truly omnichannel from a knowledge perspective, as well as from a logistics perspective?

Probably to some extent.

But you're right about AutoAnything.

One of their competitive differentiators is the online chat and then the call center and the ability to help customers through more complicated transactions.

And, also -- to tag on to Michael's question before -- the average transaction value on AutoAnything is dramatically higher even than what we experience in the store.

So, keep in mind that the majority of things that we're selling are way less than $100 per unit items, so they're typically smaller tickets.

Are you deliberately perhaps trying to position the websites differently at this point in time?

Or is it a matter of time until you bring more functionality and more of that engagement opportunity to the Zone site?

I think we'll continue to enhance the zone site and continue to bring more and more functionality enhancements.

But those two sites will always be positioned differently because one is strictly an online-only website and the other has the over 5,000 stores with 84,000 people being able to provide great customer service.

So, it's a different value prop.

Great, thank you so much.

Thank you.

Our last question is from Mr. Chris Horvers of JPMorgan Chase.

Thanks for taking the question.

My question is, how do you think about the risk that sales trends decelerate from what you've seen in August and September, the hot summer is behind us?

Are you seeing acceleration in non heat-affected categories?

And related to that, do you think the boost from the lower gas prices last year is now getting behind us and it's a part of the outlook until we get to that cold weather?

I think any time gas prices are low, it's going to benefit us.

Especially you think about the impact of lower gas prices on the low-end consumer, that's putting more dollars in their pocket.

No different than the fact that we see significant increases in our business when tax refunds happen in February and March.

Whenever our customer has some money in their pocket we seem to benefit from it fairly significantly.

As for what are the trends going to be in Q1 and Q2, you know we don't really give guidance.

As you look at Q1 and Q2 last year, we're comping against more difficult comparisons.

We do believe that the weather implications or weather impact is going to continue to be a bit of a headwind.

But we like where we stand.

We're going to continue to fight it out and do the best we can every day.

It sounds like, getting beyond batteries and AC repair, there's got to be some other parts of the business that get better to compensate for that lift that you see when you see extreme heat?

Yes.

Batteries and AC heating parts are the big parts.

By the way, it's still quite hot across lot of parts of the country right now.

Hopefully we'll have a bit of an Indian summer and that will help us, too.

And then my follow-up is, it looks like, if you look at the narrowing the gap between what we calculate as commercial and DIY comp, it went from 600 basis points the past two years to 300 this year.

So, it sounds like the maturation is really the single and almost exclusive factor that drove the narrowing gap between the performance.

I think that's a good way to put it.

Okay.

Thanks very much.

Good luck.

Thank you.

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

We are excited about our growth prospects for the year.

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

We have a solid plan to succeed this fiscal year.

But I want to stress, this is a marathon and not a sprint.

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

We thank you for participating in today's call.

Thank you.

That concludes today's conference call.

Thank you all for participating.

You may now disconnect.