汽車地帶 (AZO) 2017 Q1 法說會逐字稿

Good morning and welcome to the AutoZone conference call.

Your lines have been placed on listen-only until the question and answer session of the conference.

Please be advised that the 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 begin with a short presentation on the highlights of the quarter.

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

Central Time, 11 a.m.

Eastern Time.

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

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

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

These are based on assumptions of assessments made up by management in light of experience or 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 recession or conditions, competition, product demand, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs or suppliers, energy prices, war and the prospect of war, including terrorists activity, construction delays, access to available and feasible financing, the compromising of the confidentiality availability or integrity of our 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 the annual report on form 10K for the year ended August 27, 2016 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 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 result of information, future events or other wise.

Actual results may materially differ from anticipated results.

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

Sir, you may begin.

Good morning and thank you for joining us today for AutoZone's 2017 first quarter conference call.

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

Regarding the first quarter, I hope you've had an opportunity to read our press release and learn about the quarters' 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 our Company for again delivering solid results this past quarter.

We continued to execute our plan and generally achieved our goals although our sales results were below our plan.

Our domestic AutoZone business expanded growing same-store sales 1.6% while opening another 16 new stores.

We expect to open approximately 150 new domestic stores in FY17.

Our commercial business continued to expand with 6.3% sales growth over last years first quarter while opening 35 net new programs.

We expect to open approximately 200 net commercial programs this fiscal year.

At the end of the quarter 83% of our domestic stores had a commercial program and we continued to expand in Mexico, opening five new stores.

We didn't open any additional locations in Brazil or IMC this quarter.

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

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.

Regarding the internet, we experienced a challenging quarter.

When I discuss online, I'm referencing business shift directly to the customer and not buy online and pick up in store.

Our pick up in store business sales are recorded in store sales and are not in our all other category.

While our pick up in store business continues to thrive and is growing rapidly, our ship-to-home businesses were softer than last year.

Our objective is to provide our customers with exceptional service regardless of how they want to interact with us.

And it isn't surprising to us that many of them want to research their purchases online and then purchase or pick up their products in store.

This allows them to have immediate access to their purchases and affords them the opportunity to get the trustworthy advice they have come to expect from our AutoZoners.

While our sales shortfall on ship-to-home purchases is not surprising to us, we are continuing to invest in an accelerated rate to improve the online shopping experience to ensure that our customers interactions with us through any channel are exceptional.

While our DIY operations remain our number one priority, we are focused on growing our commercial business where our share is smaller.

To this end, we have continued with our inventory placement and distribution initiatives in order to respond to the ever increasing challenge of parts demand in the industry.

This past quarter we've expanded our multiple delivery frequency rollouts to an additional 161 net locations and now have approximately 2,100 of our 5,300 domestic stores receiving three or more deliveries per week from our distribution centers.

Regarding our Mega Hub rollouts, we are working diligently on the development of future sites but we did not open any incremental locations this quarter.

We continue to operate 11 Mega Hubs and expect to open several more over the remainder of FY17.

Our Mega Hubs continued to exceed our expectations.

Additionally, we are continuing to expand our distribution network.

In the first quarter we opened our second distribution center in Mexico and have two distribution centers under construction in the United States.

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 held in Memphis at the end of September was entirely focused on providing wow customer service with an emphasis on saying yes we've got it to all of our customers parts, products and advice needs.

We demonstrated our enhanced abilities to allow AutoZoners to be able to see and access inventory at their stores, nearby stores, hubs, Mega Hubs and vendor stocked inventory.

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

Under the yes-we've-got-it theme, we are focused on improving our closure rates.

It is always 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, investments and enhancements to capture data about our customer shopping patterns across all of our platforms.

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

Before getting into specifics on the first 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 skews that are stocked in our stores.

And the Mega Hubs are focused on adding additional coverage to the local markets, meaning adding skews that would not have been available in the market before.

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

It is easier to evaluate the Mega Hubs success because we would have had to order the 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 could have transferred the merchandise from a different store or sent the customer to another store.

Regarding multiple frequency of deliveries, we've implemented this enhanced service in roughly 2,100 of our 5,300 domestic stores.

And these stores are receiving deliveries from their distribution center at least three times a week.

Some stores receive more deliveries than three but weekly volumes determine the 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 had historically run.

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

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

Over the next nine months, we expect to roll this increased frequency model to roughly an additional 300 stores.

We have moderated our rollout pace over the remainder of the year to temper the significant change our distribution centers have to absorb and to manage our cost structure.

This past quarters deleverage was above our cost expectations.

Once we open our new distribution centers, it will allow us to expand this service in those areas at lower costs.

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.

We are currently operating 11 Mega Hubs and will open or expand several more Mega Hub stores in 2017.

We are very excited about what the Mega Hubs allow us to offer customers.

As a reminder, these super sized AutoZone stores carry [80,000] to 100,000 unique skews, 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.

Currently we have over 3,500 stores with access to Mega Hub inventory.

A majority of these 3,500 stores receive their service on an overnight basis today but as we expand our Mega Hubs, more of them will receive this service the same day and many will receive it multiple times per day.

We expect to ultimately operate 25 to 40 Mega Hubs once the implementation is complete.

The constraint on the speed with which we can open these is availability and location of real estate.

While an average AutoZone location is just under 7,000 square feet, a Mega Hub is on average 20,000 to 30,000 square feet or more.

Identifying and developing these locations in prime retail areas is challenging and takes time.

While there are incremental costs to these rollouts, we continue to feel these investments will provide a better customer experience and increased market share.

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

In order to provide more frequent deliveries to new stores, as well as the Mega Hubs, we are moving forward on our planned opening of two domestic distribution centers over the next couple of years.

For your modeling purposes, each new distribution center is expected to cost approximately $60 million.

For 2017 we will incur a majority of these two distribution centers investments in our CapEx budget; however, we don't expect any domestic distribution center to come on line until late FY17 or early FY18.

Now let's turn to our first quarters results.

Our sales increased 3.4%.

Our domestic same-store sales were up 1.6%.

This quarter's sales were consistent until the last couple of weeks of the quarter.

Our sales were challenged the week of the presidential election, which slowed our performance.

We did experience positive comps in every month of the quarter; however, November's first week was challenging for us.

We also continued to see the lingering effects of last years mild winter, hampering our growth in the North East, Midwest and Mid Atlantic markets.

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

While we saw over a 400 basis point spread between these three markets and the others in the fourth quarter, the gap continued to tighten this quarter where we saw an approximate 250 basis point spread but in the last few weeks that gap shrunk considerably.

Our expectation is that this overhang will continue until winter weather returns.

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 businesses mix.

This was usual for this time of the year.

While the failure and discretionary categories were positive for DIY, the maintenance category was slightly negative.

Our results were driven really by geography.

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

Again, regional performance played a key role in this result as the Midwestern, Mid Atlantic and Northeastern markets underperformance was traffic driven.

We opened 35 net new commercial programs in the quarter versus 55 net new programs in last years first quarter.

Our sales grew 6.3% on the quarter in commercial and our programs opened grew by 5%.

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

Regarding Mexico, we opened five stores this quarter and now have 488 total stores in Mexico.

In local currency, Mexico experienced a strong quarter; however, Mexico's sales in US dollars were below historic growth rates given the roughly 23% decrease in the value of the peso to the US dollar based on year-over-year quarter ending rates.

Additionally, as I said earlier, our second distribution in Mexico opened this past quarter.

Sales in our other businesses for the quarter were down 4.2% over last year.

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

As I mentioned, we saw site traffic and ship-to-home sales challenged during the quarter; however, we saw strength in our pick up in store sales.

This strength in pick up in store encourages us to continue investing in our in-store experience.

Pick up in store, while smaller than home delivery, is quickly catching up in sales volume.

We recognize that the majority of our site traffic is providing information to our customers prior to their purchase and our eCommerce platform represents an important part of our omni-channel experience.

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

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

With 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 continued to increase.

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

This trend is encouraging for us.

Regarding our expectations for the remainder of 2017, our second quarter results are our most difficult comparison.

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, we believe we should improve in those regions.

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 41 consecutive quarters of double digit EPS growth.

Now let me review our highlightings regarding execution of our operating planned theme for 2017, yes-we've-got-it.

The key priorities for the year are great people providing great service, profitably growing our commercial business, leveraging the internet, yes-we've-got-it and leveraging information technology.

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're now enhancing our training to store level AutoZoners and 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.

The focus is on making sure AutoZoners can see inventory availability across the entire organization, not just their store, swiftly and accurately.

In regards to commercial, we opened 35 net new programs during the quarter.

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

Our sales growth rates slowed in recent quarters.

The industry saw a similar slowdown.

Our data shows we again gained share this past quarter.

We believe last year's mild winter continued to hamper industry sales growth as regional discrepancies played a big role in commercial as well as retail.

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

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

We should also highlight another strong performance in return on invested capital as we were able to finish our first quarter at 31.3%.

We are very pleased with this metric as it is one of the best, if not the best, in all of hard line's 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 to capital.

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

Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to thank and reinforce how appreciative we are of our entire team's efforts to continue to deliver on their commitments.

We remain bullish on our future performance because we have a great business operated by exceptional AutoZoners.

Now I'll turn it over to Bill Giles.

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.

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 3.7%.

Switching over to macro trends, during the quarter nationally unleaded gas prices started out at $2.24 a gallon and ended the quarter at $2.16 a gallon, a slight decrease.

Last year gas prices decreased $0.42 per gallon during the first quarter starting at $2.51 and ending at $2.09 a gallon.

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

And as cost reductions help all Americans, we hope to continue to benefit from this increase in disposable income.

We also recognized that the impact of miles driven on cars over 10 years old, the current average, is much different than on newer cars in term of wear and tear.

Miles driven increased 1.6% in July, 2.9% in August and 2.9% in September.

And we don't have October or November data yet but year-to-date through September, miles driven are up approximately 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 [$1.781 million] for the quarter for the 52 weeks ended.

Now for the quarter, total commercial sales increased 6.3%.

In the first quarter, commercial represented 19% of our total sales and grew $27 million over last years first quarter.

This past quarter we opened 35 net new programs versus 55 programs opened in our first quarter of last fiscal year.

We now have our commercial program in 4,425 stores, or 83% of our domestic stores, supported by 182 hub stores.

Approximately 900 of our programs are three years old or younger.

In 2017 we expect to open approximately 200 new programs.

As we have begun our FY17, our trends have accelerated modestly, which is encouraging to us.

We are 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.

We are encouraged by the initiatives we have in place and feel 2017 should be a better sales growth year than 2016.

Our Mexico stores continued to perform well.

We opened five new stores during the first quarter.

We currently have 488 stores in Mexico.

This upcoming year we expect to open approximately 40 new stores.

As Bill said earlier, we were challenged by 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 was much greater than we assumed at the start of the year.

The peso devalued over the course of the quarter but moved materially post the US election in November.

While devaluing 23% year-over-year, it weakened 11% in just this quarter with a majority of the decline in the quarter in the first two weeks of November.

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

The EBIT dollar impact on quarter, assuming constant currency with last years foreign exchange rate, was meaningful -- a roughly $6 million impact to EBIT.

We do believe the Mexico leadership team has done an exceptional job managing the peso denominated business and we continue to feel like the moves will be manageable.

Regarding Brazil, we currently are operating eight 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 over time by a weak Brazilian real relative to US dollars.

Recapping this past quarters performance for the Company, in total, our sales were $2.468 billion, an increase of 3.4% over last years first quarter.

Domestic same-store sales, or sales for stores open more than one year, were up 1.6% for the quarter.

Gross margin for the quarter was 52.7% of sales, up 23 basis points.

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

In regards to inflation, it was again slightly down 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 their remains opportunity for gross margin expansion within both the retail and commercial businesses.

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

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

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

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

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

SG&A for the quarter was 34.1% of sales, lower by 1 basis points from last years first quarter.

Operating expenses as a percentage of sales were relatively flat to last year as favorability across several areas was offset by higher domestic 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 $459 million, up 4.8% over last year's first quarter.

Our EBIT margin was 18.6%.

Interest expense for the quarter was $33.3 million compared with $35 million in Q1 a year ago.

Debt outstanding at the end of the quarter was $4.997 billion, or $243 million more than last year's quarter balance of $4.754 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 34.7% versus last year's Q1 of 35.9%.

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

But additionally, I want to take a moment to discuss AutoZone's first quarter adoption of a new accounting standard.

The new standard has us recognizing the tax benefit received from the gains employees have on stock options as a credit to income tax expense on the P&L.

Previously it flowed through stockholders equity.

This past quarter it lowered our tax rate 74 basis points and benefited EPS accordingly.

However, this accounting change also has an effect on the diluted share count calculation resulting in higher or more dilutive share count.

Net income for the quarter was $278.1 million, up 7.8% over last year.

Our diluted share count of 29.7 million was down 4.6% from last year's first quarter.

The combination of these factors drove earnings per share for the quarter to $9.36, up 13% over the prior year's first quarter.

The new accounting standard just mentioned increased our diluted share count by 226,000 shares, reducing our reported EPS by $0.08 a share.

Netting the benefit in our tax rate with the impact from a higher reported diluted share count raised our EPS by $0.03 on the quarter.

While not a large impact on the EPS, we feel it is important for investors to know how the accounting change will affect results.

We'll continue to keep you abreast of any impacts going forward in future quarters.

Relating to the cash flow statement, for the first fiscal quarter we generated $407 million of operating cash flow.

Net fixed assets were up 6% versus last year.

Capital expenditures for the quarter totaled $98 million and reflected the additional expenditures required to open 23 new locations this quarter, capital expenditures on exiting stores, hub and Mega Hub store remodels and openings, work on development of new stores for upcoming quarters, development of our New Mexico DC and some minor investments in our new domestic DC's and information technology investments.

With the new stores opened, we finished this past quarter with 5,313 stores in 50 states, the District of Columbia and Puerto Rico, 488 stores in Mexico and 8 in Brazil for a total AutoZone store count of 5,809.

We also had 26 IMC branches open at fiscal year end, taking our total locations to 5,835.

Depreciation totaled $71.8 million for the quarter versus last years fiscal quarter expense of $66.3 million.

This is generally in line with recent quarter growth rates.

With our excess cash flow, we repurchased $363 million of AutoZone stock in the first quarter.

At quarter end we have $783 million remaining under our share buyback authorization and our leverage metric was 2.5 times at quarter 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 [trading] firm has its own criteria.

We continue to view our share repurchase program as an attractive capital deployment strategy.

Accounts payable as a percentage of gross inventory finished the quarter at 110.3%.

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

The Company's inventory increased 7.3% over the same period last year, driven primarily by new stores during the fiscal year.

Inventory per location was $647,000 versus $624,000 last year and $625,000 just this past quarter.

Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative $67,000 versus negative $66,000 last year and negative $80,000 this past quarter.

Finally, as Bill previously mentioned, our continued discipline 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 41st consecutive quarter of double digit EPS growth, delivering an EPS growth rate of 13% this quarter.

While we continued to experience more regional sales differences than usual, our Company executed exceptionally well.

Our focus remains on being successful over the long run.

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

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

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

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 highlight some of the exciting initiatives we have in store for FY17.

We will continue to expand our AutoZone store footprint in the United States, Mexico and Brazil, opening approximately 200 locations combined.

We will open roughly 200 additional commercial programs.

Our inventory availability efforts will expand with the opening of another handful of Mega Hubs and with the further expansion of multiple deliveries per week to 300 or so more stores.

We have already opened our second distribution center in Mexico and we have two domestic distribution centers currently under construction.

Our investments in technology continue to accelerate with an intensified focus on our online offerings.

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

We are determined to meet all of 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.

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 was 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 intention 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 ensure we -- and to 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.

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

(Operator Instructions)

Our first question is from Alan Rifkin from BTIG.

Thank you very much.

My first question relates to Bill, your commentary regarding eCommerce.

Not the buy online pick up in store aspect but the eCommerce has transacted and shipped.

You said that business you felt was challenging.

Can you maybe provide a little bit of color behind that?

And as a bigger picture, do you think net-net your industry really lends itself to eCommerce penetration in a significant way going forward?

Thanks, Alan.

Actually, just to jump in first, just to level set, it's not a material amount of business being conducted from an eCommerce perspective for AutoZone overall.

Secondly, during quarter we were a little less promotional online and we pulled back a little bit from some of our paid advertising as well.

What we are more focused on is improving experience for the customer.

And as Bill mentioned before, we continued to drive a lot of sales through buy online and pick up in store.

And that part of the business continues to remain very strong.

From a pure ship to home basis, on both AutoZone.com and AutoAnything, those were a little softer during quarter.

But like I said, we've though we were a little less promotional during the quarter and we're also investing some things in the platform that will probably slow us down a little bit as we continue to migrate through that.

So when you think about eCommerce, we're not immune to sales through eCommerce.

But at the same time, when you think about the experience that you have walking into an AutoZone store, there's a lot of trustworthy advice that's taking place.

And so when someone walks in and wants to buy a battery, which you can't buy online because you can't ship it, we'll likely test your entire starting and charging system in order to ensure that is the problem we are going to solve for you.

So there's a lot of things that take place in this store between starters and alternators that have cores attached that require those products to come back.

There's an ability for an AutoZoner to walk out to the car and be able to assess and ensure that the customer is getting what they need and being able to resolve their issues and being able to see the parts before they purchase it.

So there's a lot of things that experience inside of a store that you can't duplicate online.

Again, we're not immune to online sales but we believe that there are a lot of attributes that make it unique inside the store, the experience inside the store.

Okay thank you, Bill.

My follow-up is for Bill Rhodes.

Bill, you said that with respect to the increased delivery program, the frequency of delivery program, there will be a total of 300 in this fiscal year, more than half of which have already been opened.

It sounds like, Bill, you're slowing that program down just a little bit so that the DC infrastructure can be built.

Is that a correct assumption on my part?

And if so, what would be the incremental savings with respect to just pulling back a little bit on the increased delivery frequency program?

Thank you.

It's hard to say isn't it, Alan?

So a couple of things.

One, I may not have been perfectly clear in my remarks.

We've opened roughly 161 so far this year.

We've opened 161.

We're going to open 300 more.

So think about 100 per quarter for the balance of the year where we had been running at about 300 stores per quarter.

So we are deliberately slowing the rollout of multiple frequency of delivery.

The biggest reason that we are slowing the rollout is because we put a massive amount of change on our supply chain over the last couple of years getting to these 2,100 locations that are already on there.

So just think about that.

That's 4,200 incremental deliveries for our supply chain in just two years alone.

And that has just been a massive amount of change and we need to slowdown and let them absorb that change.

We're also mindful that it does impact our cost structure.

And so we want to slow it down, mainly for the supply chain, but also to make sure that we continue to have reasonable profitability.

And as we mentioned, it costs us roughly 15 basis points in the quarter but there are other costs that aren't in that number just from the amount of change that we've had in our supply chain and those kind of things.

So we're going to slow it down a little bit.

Okay.

Thank you both very much.

Thank you.

Thank you.

Our next question is from Simeon Gutman from Morgan Stanley.

Thanks.

Good morning.

Bill, I guess without the -- or Bill Rhodes, sorry -- without maybe that election time frame or bump that you mentioned you experienced, I guess we're left to assume that the business is running maybe around two or a little better than that.

Does the business need weather to get back to that level sustainably?

Or is that about the right run rate?

And connected to it, can you tell us if the weather impact in markets -- are they running in positive territory or negative territory?

Great question, Simeon.

First of all, yes, your assessment about what would happen without the week of the election is probably pretty accurate.

We were running close to a two comp for the quarter.

I do believe that there is still a headwind in our overall comp from the lingering effects of last year's mild winter.

We said that it moderated but we still had a 250 basis point gap between what happened in those markets and what happened in the other markets.

So to do the math, if there's 250 basis points, we ran a 1.6 comp, clearly those markets ran negative comp for the quarter.

I believe, just as we saw in 2012, once the effects of a cold winter hit, we will see improvements in our overall comps in those markets, clearly.

But I also want to be careful.

It's not going to happen overnight and I'll give you some examples.

Last year during this period of time, in December it was very warm and our sales were really strong.

But they weren't strong in the categories that we traditionally sold.

We were doing really well with things like under car, brakes and the like, [chassis], because the weather was conducive for people to do maintenance projects that they normally don't do this time of the year.

So we in essence pulled brake business forward and we didn't get the failure business.

So we had a pretty strong Q2 last year.

It was really Q3 and Q4 and now into Q1 where we saw the bigger impact from the lack of a serious winter last year.

So we're excited that we're about to see the first really good cold snap of the year.

We're excited to see what that will mean to us.

But it will be really Q3 before we expect to see any rebound.

Okay.

My follow-up, I think you mentioned that some of the supply chain costs were higher than what you would have liked.

And I think that's what you mentioned.

If I'm not mistaking, the press release said 14 basis points of supply chain cost.

That seems a little lower than the 20 basis point run rate that I think was the long term guidance and roughly where you've been running.

So why, if that's all right, why is 14 basis points disappointing?

I would say that the 14 basis points is really what we can tie specifically to more frequent deliveries.

We definitely believe that there's some overhang costs that are occurring inside the distribution centers that are probably related to that.

We just didn't tag it to it specifically.

So our deleverage on supply chain was in the mid 20s for the quarter.

But it was probably only 14 that we could specifically call to the actual more frequent deliveries.

But we recognized that look, based on the run rate that we were going as far as the rollout, it is just prudent to pull back a little bit and be able to improve the efficiencies of the organization.

As we move through this we're still committed to rolling it out.

We're just going to roll a few less as we move forward.

But going forward, I would think it would be around that 15 basis points and hopefully overall deleverage will be a little bit less.

Okay thanks.

Thank you.

Thank you.

Our next question is from Michael Lasser from UBS.

Good morning.

Thanks a lot for taking my question.

First on your commentary around the internet, can you contrast the customer who would buy online and have a product shipped to their home versus the customer that would go to your store and either buy it there or initially buy it online and pick it up in the store?

Are they the same customers that you're migrating customers from one channel to another or is the profile different?

I think that in many cases, the customers are the same.

They are probably omni-channel customers overall.

They just may have different shopping needs at the moment.

So think about things like accessories et cetera.

Those might lend themselves a little bit more to an online because they are not needed at the moment and there may not be a significant amount of advice required for making that purchase.

Versus it could be the very same customer who wants to do a brake job or wants to do engine management job but also wants to make sure that they know what they are doing.

So they walk into the store and be able to see the product, make sure it matches up, it's the same fit, et cetera.

They may also want to get some repair instructions that they can get at the store.

And they may also need a tool that is very specific to that job that, quite frankly, they don't want to go out and spend the money to buy that tool for one-time usage.

And they can come to the store for a Loan-A-Tool.

So I think that it can be both a customer using both channels overall, just different purposes.

And you'd indicated that both your AutoAnything and your core AutoZone business had decelerated.

Is that right?

Can you size the relative difference of those businesses within the eCommerce portfolio?

Yes, I would say that the AutoAnything business is obviously larger than the AutoZone eCommerce businesses from a ship-to-home perspective.

AutoZone.com is really about being able to, again, create an omni-channel environment for a customer to come in and be able to do research on products, ensure that it's in stock and then possibly either buy it online, pick it up in store, buy it online have it shipped to home or just gain the information, which is typically what happens, and then go to the store for the purchase.

So both sites were down in the number we reported is probably close enough for both.

And, again, different reasons but we did pull back from a promotional perspective and also from paid advertising perspective.

Let me add one last follow-up question.

On the difference between the weather and the non-weather effect in markets, did you see -- so you saw the spread narrow and trends were improved a bit from last quarter, so did the non-weather impacted market decelerate over the course of the quarter?

Or was the gap narrowed only because the weather impacted and markets got better?

Remember, our comps this quarter were about 60 basis points ahead of where they were last quarter.

So I think it's fair to say -- I don't have it right in front of me -- but the balance of the chain ran about the same that they ran last quarter, plus or minus 20 basis points.

Okay.

Thank you so much.

Thank you.

Our next question is from Matthew Fassler from Goldman Sachs.

Thanks a lot.

Good morning to you.

Good morning, Matt.

So my first question most likely for Bill Giles.

Your SG&A dollars were up, I believe, 3.4% year-on-year, which is a very mild increase relative to trend.

And I know you've had acquisitions for part of that time so the dollar growth is not apples-to-apples.

But that's still a very tight kind of quarter from expense control perspective.

Can you talk about how expense dollars trended versus your budget?

And if we think about expenses per store or whatever the appropriate metric is whether this is a good benchmark or whether as the sales recover presumably with compares and weather et cetera.

that expense growth rate would pick up a bit from here.

Yes, that's a great question, Matt.

And I think as we've always said, we're going to play in the environment we operate in.

And so we managed costs tight during this quarter and the whole organization, quite frankly, has done a really terrific job of pitching in and finding opportunities for them to reduce cost during this quarter.

And as we get harsher weather as we progress through the year and sales get back to higher numbers than they are today then we probably will invest a little bit back more into the SG&A and be able to support some of the things that people may have wanted to do this quarter that they were unable to do.

So I think we'll continue to manage it really tight and we'll continue to play in the environment we exist in.

Thanks for that.

A question related to expenses -- there is obviously a court ruling a couple weeks back about some of the adjustments to overtime laws, which I know has upended some of the planning that lots of companies have done that we're going to have to make changes to compensation structures.

Can you talk about what kind of contingencies you have put in place to accommodate what were going to be new laws and what your planning is from here going forward on that front?

It's a great question, Matt.

First of all, based upon our compensation programs and where we were, we didn't have terribly material changes to have to make.

Certainly there were some people that we had to move up on the scale.

And we had already communicated that to them.

And so we are living up to that communication and we're sticking with the changes.

You will not hear us call that out as a material driver of our labor going forward but there's a little bit of an impact there.

And then finally, you had this accounting change with stock option exercises tax treatment et cetera.

Will we see that anymore?

Is this a one-time adjustment?

Or do we have tax rate and share count moving around at all from here on in?

Actually, we will unfortunately.

I mean this is an accounting process that came through that I think will just create a little bit of volatility on the EPS number.

But we're committed to basically breaking it out for you guys so you can see it just as we did this quarter in our highlights page so you can see the break out.

But, yes, it's basically a function of when options are exercised and there will be an impact and so we'll report as we go forward.

So that's dependent on activity in any given quarter rather than having a new baseline to put in place?

100%.

They were pretty muted this quarter, by the way.

So it will increase volatility going forward.

Understood.

Thank you so much, guys.

Thank you.

Thank you.

Our next question is from Seth Sigman from Credit Suisse.

Thanks a lot and good morning.

I just have two follow-ups.

First just on the online business.

If you look at the pure online sales plus whatever is bought online and picked up in the store, so sort of the omni-channel sales, what sort of growth are you seeing and how would you size up the omni-channel business in aggregate?

Yes, I would say in fairness, it's not a material dollar amount to the organization.

And so we can quantify it, et cetera.

But it's not significant to the organization overall.

What we're more focused on is making sure that we've got a great experience for our customers when they come to the website so they can get all of the information they want.

They can learn about the product, find out whether it's in stock, pricing, et cetera, and then learn the difference between good, better, best, et cetera.

And then go to the store and be able to purchase it or ship it to their home or buy online and pick up in store.

At the moment, many people come to the website to gain information before shopping at the store.

So what we're looking for is to ensure that we've got a great shopping experience in all different channels that the customer is coming to.

At the moment, many of them are coming to get information and then shopping at the store.

However, our buy online and pick up in store program, albeit small, is growing at a quick rate.

And, Bill, given that earlier you discussed how most skews in the store have maybe a quantity of one on hand.

Given the popularity of buy online pick up in store, obviously the consumer wants to come to the stores in these situations, how do you effectively manage the availability to serve that trend?

I think that's no different.

That trend is no different than the trend that we have in people that are walking in the stores today.

It is very challenging to make sure that we're in stock when we have roughly 70% of the skews in the store have one piece on the shelf And frankly that's why we are doing this multiple frequency of delivery.

Before, if you bought it the first day we got the truck we would be out for seven or eight days.

We're trying to get it back in stock quicker whether it's for the walk in customer, the commercial customer or the online customer.

Okay.

And just one follow-up on the gap in regional trends.

So if the gap this quarter was 250 basis points and then last few weeks you said that gap shrunk considerably, it doesn't seem like weather really changed meaningfully over that period.

So is there something else that would be causing that improvement?

No, I think we probably don't need to be focused too much on a week or two and what happened.

What we did say was you had closed at the end of the quarter, there was a lot of things going on at the end of the quarter including the election.

What we did say was we anticipate there will continue to be a gap this quarter, hopefully beyond that it will close.

Understood.

Thank you very much.

Thank you.

Our next question is from Brian Nagel from Oppenheimer.

Hi.

Good morning.

Thank you for taking my questions.

Good morning.

So a follow-up on the election comment -- and with a number of retailers across sector have discussed this, this election impact lately, so the question I have is if you look at the AutoZone data, do you think that the weakest we saw getting into and around the election was just simply reflection of trepidation on the part of the consumer?

Or did AutoZone pull back on marketing that some other companies have alluded to that may have maybe impacted the call to action if you will for consumer spending?

No.

We absolutely didn't change our game plan one bit and won't change it going forward.

When we talk about the election impact, yes, it was a little bit softer going into the election.

But a couple days after the election, there were a lot of people that were surprised by the outcome of the election.

And we saw it clearly in our sales.

And then it kind of rebounded from there.

So I don't want to overplay that but it clearly was a meaningful difference for two or three days.

And then the follow-up question I had, going back to comments you made in your script regarding closures and that opportunity within your stores, we've discussed this before -- a two part question.

One, are you seeing, with the initiatives behind improving closures from the store, are we seeing some progress in that front?

And then maybe help us or frame -- again frame just what the magnitude of the opportunity is to improve that closure metric.

Yes, I think clearly the closer we get the parts to the customer, we see improvements in closure rates.

And clearly the easiest way for us to see it and measure it definitively is with the Mega Hubs.

And the Mega Hubs are really performing well.

And that's why we're pushing as hard as we can on them to get that inventory closer and closer to the customer.

Okay got it.

Thank you.

Thank you.

Thank you.

Our next question is from Greg Melich from Evercore ISI.

Great.

Actually I have a couple follow-ups.

How much did inflation or deflation impact the COGs and the top line in the quarter?

I'd say not significant, Greg.

We have a little bit of deflation.

A lot of it is oil related to some extent.

But I would say there's a mix between categories.

Some categories did have inflation but let's just answer the question quickly and I would say not material.

Got it.

And then the second question I had was where are we now in terms of private label penetration?

If we were to thinking about your sourcing and put it in the three buckets, how much is sourced domestically, how much do you think comes from outside the US and, of that, how much is your own sourcing versus a vendor buying it and bringing it in rough numbers?

I would say our private label product is probably in the over 50% -- probably in the 50% to 55% overall.

I would say that in the direct imports, it is probably in the teens kind of a number.

As far as products that are sourced overseas that we sell in its entirety, its got to be around 70%.

I don't have the number exactly but it's probably pretty close to around that 70% kind of number.

Okay, great.

Nice summary.

And then last -- and this is shifting on inventory but more about where you put it and why.

As you put the more inventory in the stores, I think you mentioned that it gets picked up by everybody.

It helps sales in both DIY and do it for me.

What is the percentage?

When you find that you're in stock with these additional skews closer to the customer, is it still 80/20 DIY versus commercial or 50/50 or tell us a little bit of how that's progressed?

I would say it's between those two.

It's not the traditional 80/20.

Generally when we are doing it, particularly with the Mega Hub inventory, that is newer vehicle inventory.

So it skews towards commercial but we're always amazed at how much we actually sell in DIY.

So it depends by category so it's hard to give you a generic answer but it's probably in the 60/40 range.

Interesting.

Thanks a lot.

Good luck guys.

Thank you.

Thank you.

Our next question is from Dan Wewer from Raymond James & Associates.

Thanks.

Bill Giles, you noted that commercial sales growth should accelerate in 2017 compared to 2016.

How would you look at the outlook for the do-it-yourself channel?

Do you think it accelerates as well?

I think when you think about some of the impacts that we've had from the weather overall, I think that it was an overhang for both sides of the business, quite frankly.

And so I think that we're optimistic as we head into FY17.

With a normalized winter, I think the business overall should improve.

And lastly I just want to clarify, Bill Rhodes, your comment that perhaps the Thursday or Friday after the election you did see business return back to that 2% same-store sales run rate.

I wasn't that specific, Dan.

I know.

(laughter) But you're trying to get me to be more specific than I care to be.

What I said was there was a notable, meaningful drop in our sales -- call it Wednesday, Thursday and even into Friday.

And then --

After that I think it's more driven by weather and other impacts.

But you could clearly see it for two or three days.

And then the last question going back to Bill Giles.

With the sharp change in interest rates since the election, how does that impact the performance and profitability of the vendor financed inventory model?

We've always looked at -- as you know, we always look at interest as an input cost overall.

So there's a variety of input costs that it takes to manufacture a product, whether it be steel or energy an interest as another component of that.

So we'll just continue to manage that with our vendors like we do all other costs.

Okay.

Thank you.

Thank you, Dan.

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

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

We will not take anything at all 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 holiday season and a prosperous New Year.

Thanks for joining us today.

That concludes today's conference.

Thank you all for participating.

You may now disconnect.