汽車地帶 (AZO) 2017 Q4 法說會逐字稿

Good morning, and welcome to the AutoZone Conference Call.

(Operator Instructions) Please be advised, today's call is being recorded.

If you have any objections, 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 A.M. Central Time or 11 A.M. Eastern Time.

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

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

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

These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate.

These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, credit market conditions; the impact of recessionary conditions; competition; product demand; the ability to hire and retain qualified employees; consumer debt levels; inflation; weather; raw material costs of our suppliers; energy prices; war and the prospect of war, including terrorist activity; construction delays; access to available and feasible financing; the compromising of the confidentiality, availability or integrity of information, including cybersecurity attacks; and changes in laws or regulations.

Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of the annual report on our Form 10-K 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 in the risk factors could materially and adversely affect our business.

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

Except as acquired 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.

I introduce your speaker for today, Mr. Bill Rhodes.

Please go ahead.

Good morning, and thank you for joining us today for AutoZone's 2017 Fourth Quarter Conference Call.

With me today are Bill Giles, Executive Vice President and Chief Financial Officer; 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 company for their tremendous efforts during this past quarter.

Our results for the fiscal fourth quarter were in line with our expectations and demonstrated steady improvement compared to our fiscal third quarter performance.

Sales results from month-to-month were relatively consistent.

However, the Northeast, Mid-Atlantic and Midwestern markets remained challenged and underperformed the remaining parts of the country.

As has been well documented, following 2 consecutive mild winters, many of the categories that are influenced by harsh winter conditions continued to be pressured.

Additionally, this summer's temperatures were generally mild and our category performance in many of the hot weather categories were softer than we expected.

Overall, we were encouraged to see our same-store sales return to being positive despite these headwinds, and market share data indicates that our share gains have been accelerating.

We continue to make good progress on our initiatives that are aimed at improving our ability to say yes to our customers more frequently, drive traffic to our stores and accelerate our commercial business.

Specifically, we saw improvement in our commercial business and in our supply chain.

Total commercial sales increased 5.9% compared to 3.6% in Q3.

While our supply chain expenses delevered versus last year, we began to make improvements in our network and are beginning to operate more efficiently again.

During the quarter, we opened a new distribution center in Pasco, Washington and expect to open an additional DC in Ocala, Florida in mid-fiscal 2018.

We also continue to be encouraged by the sales increases we experienced from our Mega Hubs, which typically service several hundred stores.

The Mega Hubs act as distribution nodes for hard-to-find parts for their network stores.

We opened 2 new Mega Hubs during the quarter and expect to open approximately 10 more in fiscal 2018.

These Mega Hubs further our ability to say "Yes!

We've Got It." to all of our customers.

Before getting into more detail about the quarter, I want to share our perspective on some of the trends and headwinds that our industry, and specifically our business, has recently been experiencing.

There are certain factors present today, some macro, and others that relate to actions we have taken as part of our long-term strategy that have created challenges to us delivering the same level of profitability growth that we have been delivering.

We intentionally made the decision to invest in our business at an accelerated rate in inventory, capital expenditures and operating expenses.

Unfortunately, as we increased our investment profile, our sales have been slower than we would have thought due to poor performance in several of our weather-sensitive categories, and our multiple frequency-of-delivery initiative did not generate the benefits yet that we expected.

Additionally, as our commercial program openings have slowed, our overall commercial sales growth has declined as well.

Simultaneously, we faced several other pressure points.

Over the last year, we've experienced accelerated pressure on wages, significantly more than I have experienced in my nearly 23 years at AutoZone.

Some of this is attributable to regulatory changes in certain states and municipalities, while the balance and probably the larger portion is being driven by general market pressures with lower unemployment and some specific actions taken in recent years by other retailers.

The regulatory changes are going to continue as evidenced by the areas that have passed legislation to increase their wages substantially over the next few years.

Additionally, we are experiencing increased levels of shrink and our interest expense, after years of lower rates, is beginning to increase.

The collective combination of these factors has significantly hampered our earnings per share growth.

Businesses, market trends and costs tend to run in cycles.

This year, we unfortunately experienced a disproportionate amount of them working against us.

At the same time, we've made decisions to accelerate our investment profile.

Our management team has been in this business for a long time and we've been through many different cycles.

Sometimes, we've had tailwinds and we've benefited from those.

Other times, we've had headwinds and we fought against them.

Ultimately, we manage this business for the long term to provide great service for our customers and great opportunities for our AutoZoners, ultimately delivering strong shareholder value.

While some of the current expense headwinds will remain for some period, we know that this business model had excelled over decades and we are confident, with our AutoZoners leading the charge, that will continue to be the case.

We operate in a terrific industry with very good fundamentals and we know our team can continue to deliver impressive long-term performance.

Now, let me provide more detail in the quarter.

For the quarter, our sales increased 3.3% and our domestic same-store sales were up 1%.

June was our weakest period as it was much cooler than normal.

We continue to see our Northeastern, Midwestern and Mid-Atlantic markets underperform the balance of the chain as 2 consecutive mild winters continue to negatively impact these areas, and particularly their hard parts sales performance.

This quarter, these areas' comp store sales were approximately 40 basis below the other markets, but on a 2-year basis, at almost 500 basis points, this region of the country has materially underperformed the remainder.

These regions represent roughly 25% of our overall sales.

During the quarter we opened 85 -- 84 new stores in the U.S. For the year, we opened 168 stores and expect to open approximately 150 stores in 2018.

Our commercial business expanded by 5.9% while opening 99 net new programs this quarter.

Our commercial growth accelerated from last quarter's 3.6% increase as we did not have the same headwinds in Q4 as Q3 from the income tax refund timing.

We can expect to open approximately 150 net new commercial programs for this new fiscal year.

Currently, 84% of our domestic stores have a commercial program.

During the quarter, we continued to expand in Mexico, opening 25 new stores.

We opened 5 new stores in Brazil.

This quarter marked the most openings we've had in any one quarter in Brazil.

We've been doing business in Brazil since 2013 and we expect to open several more locations in 2018.

We didn't open any additional IMC branches this quarter.

While the domestic business dominates our sales mix and continues to be our primary focus, we believe we have great growth opportunities outside of the U.S. as well.

Regarding the Internet, we experienced improving trends in web traffic, ship-to-home sales and commercial online orders.

Additionally, our Buy Online Pick Up In Store continues to grow fairly rapidly.

As we continue to make our online shopping experience better and better with ease of doing business improving, we would continue to expect these various channels to grow materially faster than in store.

Our goal is to create a seamless omni-channel experience for our customers, meeting them where, when and how they want to interact with us.

Under the "Yes!

We've Got It." theme, we remain focused on improving our closure rates, meaning converting customer requests for pricing and availability into sales.

In the spirit of satisfying our customers, we are making ongoing system investments and enhancements to capture data about our customers' shopping patterns across all of our platforms, both domestically and internationally.

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.

We expect our loyalty program and its vast membership to continue to help us mine customer shopping behaviors and grow sales materially in the future.

This will be a big focus for us in 2018.

As our primary objective remains growing our domestic retail and commercial businesses, we continued with our inventory availability initiatives in order to respond to the ever-increasing challenge of parts demand in the industry.

This past quarter, we opened 2 additional Mega Hub locations and now have 16 in operation.

We are working diligently on the development of future sites and we expect to open up to 10 more in 2018.

We continue to be very pleased with our Mega Hub performance, seeing them outperform our initial expectations.

Additionally, this past quarter, we opened our ninth distribution center in Washington State and we expect to open a Florida DC by the middle of fiscal 2018.

Both of these new DCs will reduce transportation radiuses and, therefore, lead times, while also providing much-needed additional capacity to our distribution network.

Each new distribution center costs us approximately $60 million in capital and we incur some incremental operating expenses from preopening activities and maturation.

Now, I'd like to take a moment to go into more detail on our 2 inventory availability initiatives.

These are 2 very 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, while the Mega Hubs are focused on adding additional coverage to local markets, meaning adding SKUs that would not have been available locally in our network before.

Regarding multiple frequency of deliveries, we have roughly 2,300 stores receiving more than one weekly delivery at the end of Q3.

However, as we haven't been satisfied with the benefits today, we made significant changes in the fourth quarter to test differing scenarios to determine the optimal approach.

We moved some stores from 3-time-a-week deliveries to 1- or 2-time-a-week deliveries.

We also made some significant changes to our replenishment algorithms.

Many of these changes were made in the middle of the quarter and we don't have sufficient consistent results yet to make any long-term decisions, but there are indications that are very encouraging to us.

Over the last 2 years, as we quickly ramped up this initiative, our costs substantially increased, even beyond our expectations, as we put tremendous pressure on our supply chain.

During the fourth quarter, some of the pressure began to subside and our cost increases began to abate.

We have much-continued work in front of us to determine the optimal approach and to regain the efficiencies we have historically enjoyed.

The second ongoing initiative is the Mega Hub store concept.

We are currently operating 16 Mega Hubs.

We continue to be quite pleased with what the Mega Hub allows 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.

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, both for retail and commercial.

Currently, we have over 4,000 stores with access to Mega Hub inventory.

A majority or about 2/3 of these 4,000 stores receive service on an overnight basis today, but as we expand our Mega Hubs, more of them will receive this service 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 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.

We did not experience meaningful, noteworthy deleverage from this initiative during fiscal 2017.

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 we do it on a long-term, profitable basis to provide strong returns for our shareholders.

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

And to this end, in spite of a challenging fiscal 2017, we continued to be share gainers over the course of the year.

Regarding Mexico, we opened 25 new stores this quarter and ended the quarter with 524 stores.

Mexico now represents just under 9% of our store base.

I'm so very impressed by and proud of the business, team and culture of our team in Mexico.

In local currency, Mexico experienced a solid quarter as, for the first time since the U.S. election last November, the value of the peso to the U.S. dollar strengthened.

While we cannot guarantee anything when it comes to exchange rates, we certainly hope 2018's comparisons to 2017 are more favorable.

Sales in our other businesses for the quarter were down 0.8% over last year's fourth quarter, showing sequential improvement each quarter since the start of the year.

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

This compares to being down 2.5% last quarter and reflects stronger performance in autozone.com's business in Q4.

Also, as I previously mentioned, we continued to see strong growth in our Buy Online Pickup In Store sales.

The strength in Pickup In Store encourages us to continue investing in our in-store experience.

We recognize that 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 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, the omni-channel experience is very important for the customer experience 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 sales are near all-time highs and gas prices on average are quite low, miles driven continue to increase.

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

This trend remains encouraging.

Regarding our expectations for 2018, if we return to more normal weather patterns, we expect sales performance to improve as the year moves forward.

As has been well documented, Hurricanes Harvey and Irma have had a material impact on a large portion of our country.

Our thoughts and prayers go out to our impacted AutoZoners, customers and all of those who have had to deal with the tremendous effects from these storms.

Lives have been affected and we are, in those markets, donating our time and resources to help everyone that needs us.

We've had more than 600 stores closed at some point as a result of these stores -- storms.

Through our team's heroic efforts, all of our stores are back open in the middle of last week.

We did sustain damage to some stores and are still determining the ultimate cost that will be recorded in our first quarter, but at this time, we do not expect those costs to be material.

Our efforts have now turned to Hurricane Maria, which appears headed directly to Puerto Rico tomorrow.

Now, let me review our highlights regarding execution of our operating 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 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.

We're focusing on enhanced training to store-level AutoZoners and increasing the share of voice regarding the ability to say "Yes!

We've Got It.".

We have been aggressive on our technology investments and believe these investments 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.

Many questioned how susceptible our industry is to online encroachment and how big of a role that is playing in this current industry "soft spot".

Clearly, every sector of retail has been and likely will continue to be impacted by this new world.

We have certainly studied the ramifications and continue to do so.

While some portions of our industry have migrated in small part to online, we believe that the Trustworthy Advice elements, combined with the sense of immediacy, insulates us much more than most sectors of retail, and to-date, that certainly has proven to be the case.

Our real focus is how we substantially enhance our omni-channel efforts to increase our competitive position with online and brick-and-mortar competitors.

I think we should also try to put some definition around our industry, and specifically our sales performance, in this soft spot.

There's been tremendous dialogue around our and our industry's sales performance in recent months.

Clearly, our sales growth, while positive, has been lower than the last 3 years, but our sales performance historically runs in cycles.

We had one quarter in fiscal 2017 with negative same-store sales, and the last time we had negative same-store sales for the year was 2005.

Our same-store sales have averaged 1.9% over the last 5 years.

This year, we ended the year with 0.5% growth or 140 basis points below our recent average.

In fiscal 2013, our same-store sales were flat.

By the way, that followed a very mild winter.

So yes, we see our sales softer than normal, but still within a normal band.

And we have several contributors to the 140 basis point departure from average: 2 consecutive mild winters followed by a cooler summer; tax refund delays that never materialized in our sales; also the slower growth in our commercial sales, primarily due to lower new program growth, has slowed the overall comp increases.

We believe these items have been the drivers of our sales soft spot and not a substantial online encroachment.

In regards to commercial, we opened 99 net new programs during the quarter and 202 for the year.

Our expectation is we will continue to open new programs in the range of 150 in 2018.

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

As I said on last quarter's earnings call, we embarked on a new strategic planning exercise focused solely on how we can profitably accelerate our market share growth in this very important sector of our industry.

While we were quite pleased that we have been able to, in essence, triple our sales and more than triple our profitability in commercial in the last 9 years, we know we have to continue to evolve our model to accelerate commercial sales to the next level.

We are assessing how we can more effectively provide merchandise to our customers and reduce friction across all of our customer touch points.

Commercial continues to be the most significant midterm growth opportunity for the company as we currently have approximately 3% market share and we are determined to substantially grow that over time.

We should also highlight another strong performance in return on invested capital as we were able to finish our fourth quarter at 29.9%.

We continue to be pleased with this metric and this is one of the best in all of hardline'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 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 appreciative we are of our entire team's efforts to continue to meet and exceed our customers' wants, needs and desires.

We are bullish on 2018's sales potential because we have a great business operated by exceptional AutoZoners.

Now, I'll turn the call over to 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.

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 3.5%.

For the trailing 52 weeks ended, total sales for an AutoZone store were $1,756,000.

For the quarter, total commercial sales increased 5.9%.

Commercial represented 19% of our total sales and grew $37 million over last year's fourth quarter.

This past quarter, we opened 99 net new programs versus 116 programs opened in our fourth quarter of last fiscal year.

We now have our commercial program in 4,592 stores or 84% of our domestic stores, supported by 186 hub stores.

Approximately 750 of our programs are 3 years old or younger.

In 2018, we expect to open, again, approximately 150 new programs.

As Bill mentioned just a moment ago, we remain focused on growing this business.

We are committed to having a great sales team supplemented with stronger engagement of our store managers and district managers.

We remain confident we will continue to gain market share with our commercial customers and we're encouraged by the initiatives that we have in place and feel we can further grow sales.

As previously mentioned, we are in the midst of a strategic review as we are supplementing our talented team's thoughts with those of a talented third party, giving us the opportunity to look at our business through a new and more objective lens.

While our teams have done tremendous work and have developed tremendous insights and hypotheses, we haven't determined where we go from here.

And once we do determine our strategies and tactics, they won't be rolled to the chain.

That's not the AutoZone way.

We will put manageable tests in place to determine if these are the right strategies.

And we are highly confident that they will have to be tweaked and some will work and others won't.

We expect to be testing and refining those tests for a year or so and we will keep you informed as these progress.

Our Mexico stores continued to perform well on a local currency basis.

We opened 25 new stores during the fourth quarter.

At the end of the quarter, we have 524 stores in Mexico.

We, again, expect to open approximately 40 new stores in fiscal 2018.

As Bill had said in the past, Mexico's business has been challenged throughout 2016 and 2017 by a weakening peso foreign exchange rate relative to the U.S. dollar.

Fortunately, this quarter, the peso strengthened again and finished close to where it started the year.

This fluctuation can have a more meaningful impact on earnings as our store base continues to grow.

Our Mexico leadership team has done a terrific job managing the base peso-denominated business.

And regarding Brazil, we opened 5 new stores and currently are operating 14 stores.

Our plans are to grow between 20 and 25 total stores over the next few years.

While Brazil currently runs at an operating loss, we are encouraged by the sales per store being generated.

We expect Brazil will grow its store base and even surpass Mexico's store count over time if we can prove the operating model produces sufficient returns.

Gross margin for the quarter was 52.8% of sales, down just 2 basis points.

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

While our supply chain and [trick] expense have been higher in support of our inventory availability initiatives, this past quarter showed tighter management of expenses.

We continue to feel we can manage these expense categories throughout fiscal 2018, and our primary focus remains growing absolute gross profit dollars in our total auto parts segment.

SG&A for the quarter was 32.6% of sales, higher by 53 basis points from last year's fourth quarter.

The increase in operating expenses as a percentage of sales were primarily due to deleveraging of occupancy costs and domestic store payroll driven by higher wage pressure.

EBIT for the quarter was $708 million, up 0.6% over last year's fourth quarter.

Our EBIT margin was 20.1%.

Interest expense for the quarter was $51.4 million compared with $45.8 million in Q4 a year ago.

As we completed the $600 million 10-year bond deal during the third quarter, we are planning interest of $39 million in the first quarter of fiscal 2018 versus $33 million last -- in last year's Q1.

The higher expense is due to tenor and size of the bond issued this past April.

Debt outstanding at the end of the quarter was $5,081,000,000 or approximately $160 million more than last year's balance of $4,924,000,000.

Our adjusted debt level metric finished the quarter at 2.6x 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 33.9% versus last year's Q4 of 35.1%.

I wanted to take a moment and remind listeners of our first quarter adoption of a new accounting standard.

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

This past quarter, it lowered our tax rate 62 basis points.

This accounting change also increases the diluted share count calculation.

Net income for the quarter was $433.9 million, up 1.7% over last year.

Our diluted share count of 28.4 million was down 4.8% from last year's fourth quarter.

The combination of these factors drove earnings per share for the quarter to $15.27, up 6.8% over the prior year's fourth quarter.

Excluding the impact of the previously mentioned change in accounting for stock option exercises, our EPS would have increased by 6.1% for the quarter.

Related to the cash flow statement for the fourth quarter, we generated $561 million of operating cash flow.

Net fixed assets were up 8% versus last year.

Capital expenditures for the quarter totaled $196 million and reflected the additional expenditures required to open 115 new locations this quarter; capital expenditures on existing stores, hubs and Mega Hub store remodels or openings; work on development of new stores for upcoming quarters; investments in our new domestic DCs; and information technology investments.

With the new stores opened, we finished this past quarter with 5,465 stores in 50 states, the District of Columbia and Puerto Rico; 524 stores in Mexico; and 14 in Brazil for a total AutoZone store count of 6,003.

And we also had 26 IMC branches open at fiscal year-end, taking our total locations to 6,029.

Depreciation totaled $103.1 million for the quarter versus last year's fourth quarter expense of $93.9 million.

This is generally in line with recent quarter growth rates.

We repurchased $227 million of AutoZone's stock in the fourth quarter.

At quarter-end, we had $824 million remaining under our share buyback authorization and our leverage metric was 2.6x at quarter-end.

Again, I want to stress we manage to appropriate credit ratings and not any one metric.

The metric we report is meant as a guide only as each rating firm has its own criteria.

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

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

The company's inventory increased 6.9% over the same period last year, driven primarily by new store openings.

Inventory per location was $644,000 versus $625,000 last year and $653,000 last quarter.

Net inventory, defined as merchandise inventories less accounts payable on a per-location basis, was a negative $48,000 versus a negative $80,000 last year and a negative $47,000 last quarter.

As a result, our accounts payable as a percent of gross inventory finished the quarter at 107.4%.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 29.9%.

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.

Before I conclude, I want to take this opportunity to reflect on fiscal 2017.

The year was clearly more challenging than recent years, but our team continued to deliver some very impressive accomplishments and milestones.

In recognition of the dedication, passion, innovation and commitment of our AutoZoners, I want to highlight that our sales grew to a record $10.9 billion this year and we grew same-store sales at 0.5%.

We opened our 6,000th store and had the incredible honor to do so in our hometown of Memphis, Tennessee.

In May, we opened our 500th store in Mexico, a tremendous accomplishment by that talented team.

We restarted our store development work as we enter the next phase of testing in Brazil and we expanded to 14 stores in and around São Paulo.

Our supply chain is undergoing tremendous expansion with the opening of our second distribution center in Mexico and the opening of our ninth domestic DC in the U.S. in Pasco, Washington.

Additionally, our 10th domestic DC is currently being built and we are significantly expanding one of our older DCs.

We continue to expand our highly successful Mega Hub strategy, opening 5 new Mega Hubs this year, ending the year with 16.

And our autozone.com online efforts continue to gain significant traction.

Most importantly, our customers are visiting our website at increasingly accelerated rates and using that research to inform their in-store visits.

Unfortunately, 2017 marked the year we broke our 10-year double-digit quarterly EPS earnings streak.

And while that was disappointing, it is equally important to recognize the incredible accomplishment the streak represented.

We've done deep analysis to understand the key drivers of our profitability change.

While some of them were sales-related, the larger impact came from increasing costs.

We made decisions to increase our investment profile and some of those investments haven't yet borne fruit, specifically the multiple frequency of deliveries.

At the same time, we had a disproportionate amount of changes that were working against us, increased wages and shrink, interest expense and the like.

Our focus is to deeply understand the key drivers of our business and manage those factors that we control.

Over time, macro factors will work for you and against you, and fiscal 2017 was one of those times that they worked disproportionally against us.

While we will continue to challenge ourselves, our decisions, processes and strategies, we will always invest to reinforce our guiding principles.

Leveraging our methodologies of evolution over revolution and superior execution with consistent strategy is a formula for success.

After so many years of unprecedented performance, I'm proud of our team for their steadfast commitment to our culture, strategy and approach and for their passion to deliver a materially better 2018.

We have an exceptional team that executes extremely 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 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.

Our customers have choices and we must exceed their expectation in whatever way they choose to shop with us.

We are fortunate to operate in one of the strongest retail segments and we continue to be excited about our industry's growth prospects for 2018 and beyond.

As consumers continually look to save money while taking care of their cars, we are committed to providing the Trustworthy Advice that they need and expect.

It truly is the value-add that differentiates us from any faceless transaction.

Customers have come to expect that advice from us.

It is with this focus we will implement more enhancements on both our DIY and commercial website and in-store experience to provide even more knowledgeable service.

We don't ever expect an online experience to replace the advice our customers want, but today's customers do expect more information on repairing their vehicles.

This aspect of service has always been our most important cultural cornerstone and it will be long into the future.

Our charge remains to optimize our performance regardless of market conditions 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 ourselves.

This formula has been extremely successful over the last 38 years and we continue to be excited about our future.

Now, I would like to open up the call for questions.

(Operator Instructions) Our first question is coming from Seth Sigman of Crédit Suisse.

My question is around the commercial strategy.

I know you're in the midst of the strategic review right now, but what do you think is the biggest driver of the gap today versus your competitors?

Is it availability?

Is it service?

Is it brands?

Or is it really just awareness and developing those relationships?

And then, the second part of the question is, I guess, I'm just wondering what are some of the potential outcomes of the review.

And could it actually mean an acceleration in investments?

Yes.

Unfortunately, I think it's too early.

It's premature for us to get into those specific details.

We're looking at all those individual factors that you talked about, whether it's availability, enhancing our service model, how do we work with them digitally and on and on and on.

There's a lot of different -- we're looking at leaving no stones unturned, but at this point in time, it's premature for us to really talk about where we see those improvement opportunities.

And as Bill Giles mentioned in our remarks, it's also once we decide what we're going to go do, we're going to have to go test it, put it in market and see what works and tweak things along the way.

So I think it's going to be a year or so before we really have a solid game plan where we say, here's what we're going to go do and what the cost of it will be.

Will it have an increased investment?

Potentially, certainly, but I think it's too early for us to even put any kind of guardrails around that.

And you did see an improvement in the commercial business this quarter relative to past quarters even while reducing your frequency.

And I think you also mentioned that you think your market share gains are accelerating.

So can you just help us better understand what you think is driving that?

Where that market share may be coming from?

And is it retail and commercial?

Or is it really just commercial?

You wrapped a lot of different things in that question.

Let me try to jump in.

First of all, we grew our commercial business at 5.9%.

That is clearly substantially over what the market is growing, so that makes us happy.

5.9% also is not at our aspirations for how rapidly we want to grow this business.

We have a 3% market share and we would like to grow it significantly more than 5.9%, which is why we're in the midst of this strategic review.

You also mentioned something about the fact we grew -- well, this quarter over last quarter, one of the reasons, and I mentioned it in the prepared remarks, Q3 had a big dividend for the tax refunds that we thought we would get in Q3 that never materialized.

So I think it was more the anomaly than Q4 at 5.9%.

You did mention that you felt like multiple frequency of delivery would be a headwind for us growing the commercial business.

And that was something that a lot of people were concerned about after our last call, and I'd love to address that for a second.

Multiple frequency of delivery is replenishing this -- the merchandise that's in the stores today.

One of the reasons why it has not been as successful as we had hoped is because, particularly in the commercial business, our commercial drivers, if they don't have that part available in this store, they run to the store closest to them and still service that demand.

So I don't think that slowing down our multiple frequency of delivery has been a meaningful headwind to our commercial business growth.

Now, that said, we're still trying to refine it so that we can find a way for multiple frequency of delivery to be a contributor to both DIY and commercial growth at accelerated rates.

Our next question is coming from Michael Lasser of UBS.

Bill, you talked about costs going up, the pressure that you're feeling from investments and the focus you still have on generating earnings growth.

Do you think, based on all of those factors, that you're going to resume a double-digit EPS growth any time soon, even if your comps return to normal?

Yes.

I think a couple of things there, one of which is that -- think about the model being broken down into 2 ways: One, EBIT growth, and then share repurchase.

We still have very strong cash flow generation and are able to generate EPS growth through share repurchase.

On the other side of the equation, you're right, we have made some investments and we have some cost headwinds in the immediate term.

But on a long-term basis, we'll anniversary a lot of those, [so settling] on our investments, and we'll get a more normalized growth rate in costs.

And as we resume to a more normalized growth rate in comp store sales, our expectation is that our EPS growth rate would certainly increase over where it is today.

Now, whether or not it gets to a double-digit number, we'll wait and see, but we're going to need support both from the commercial side of the business as well as just good expense management.

And I think we can achieve both of those things over time.

In the meantime, we're making some wise investments and we're testing out the markets in order to continue to gain market share on both sides of the business, retail and commercial.

So it remains an incredibly healthy industry with an incredibly healthy model, and our expectation is that it will continue to improve our earnings growth rate.

Understood.

And my follow-up question is there's not a lack of auto parts stores in the U.S. Between you and your competitors, there's well into the double-digit thousands.

You're opening another 150 this year.

At what point is the market just saturated with too many auto parts stores and you need to consider reducing -- substantially reducing your square footage growth?

Yes.

We -- we're opening new stores in markets that don't have the same competitive landscape as some of our more core markets.

If you look at many of the core markets, let's take Atlanta, for example, it seems that the big 4, AutoZone, O'Reilly's, Advance and NAPA, all have a tremendous amount of stores in that marketplace and we all seem to do just fine.

So our return characteristics are we're not going to open a store unless it does a 15% IRR or a 12% IRR in certain strategic markets.

And we are continuing to be able to find those stores.

So the cash flow characteristics of this business are tremendous and we're still able to open stores that far exceed those hurdle rates.

Our next question is coming from Matthew Fassler of Goldman Sachs.

My first question relates to SG&A.

So you did have a bigger -- a higher year-on-year growth rate than you'd had over the first 9 months of the year by about 250 basis points.

At the same time, your growth rate -- your SG&A growth rate in the fourth quarter was relatively subdued.

So on a 2-year basis, there wasn't as much of a doubt.

As we think about the rate of SG&A growth and, I guess, within a 2-year stack, and the SG&A growth is quite modest, it was quite modest the first 9 months of this year, the first 3 quarters of this year, does the dollar growth rate that we saw in Q4 look like it's sufficient to do what you need to do for the business, given how low the SG&A growth was, particularly in the middle of the year when your sales were quite soft?

Yes.

I would say that the Q4 is probably a reasonably good target number for us as you kind of think about it going forward.

And so as you -- just to jump to the chase, occupancy was a little bit higher this quarter.

There's some rent pressures there on some of the new markets that we've gotten into.

And some of the investments that we've made in technology, which typically have a shorter depreciation life, have driven depreciation costs.

But I think that Q4 is probably a good metric to look at.

And then, my second question, Bill Giles, I assume most likely for you.

So it looks like, given what you disclosed on the buyback and what we saw on the share count, there are kind of 2 things going on.

One is that you must have bought back most of your stock quite early in the quarter to get that $622 mark.

And secondly, even though the buyback was a bit smaller than we had modeled, the share count was lower, presumably just based upon where the stock price was and the treasury method.

So can you just give us clarity on both of those items related to the buyback?

Yes.

And the other thing to think about, too, by the way, relative to the buyback overall for the year is that -- I mean, I think we came in around $1,070,000,000 or so for total share repurchases this year.

But keep in mind also, we're kind of measuring or we're kind of metric-ing back to that 2.5x credit metric for EBITDAR and we wind up at 2.57 or so.

So we're a little bit ahead of what our typical target is, which is also maintaining investment-grade rating, which we believe is the right place for us to be.

So there's no change in the capital allocation strategy.

We may have bought back the stock a little bit earlier in the quarter overall, but more importantly, from a capital allocation strategy, we're maintaining that 2.5x EBITDAR credit metric, maintaining investment-grade rating and we'll continue to deploy capital in that method.

And did the treasury method kind of knock the share count down a little bit in terms of options, valuations and such?

Was that part of the calculus for the share count being as subdued as it was?

Yes.

Maybe just a little bit relative to the share -- to the option accounting, that it definitely has a little bit of an impact on that.

Our next question is coming from Alan Rifkin of BTIG.

First question for Bill Rhodes.

Bill, you spoke about the expense headwinds and, in particular, higher wages.

Do you think that that's more of just a 2017 phenomena?

Or do you believe that, that may continue going forward?

And if so, would you contemplate maybe raising prices?

Or is any inflation out there solely predicated on commodity prices and not other factors?

Yes.

It's a great question, Alan.

First of all, I think there's 2 different elements of it that have happened.

First of all, there are a series of retailers that moved wages up in 2015 and '16, and the effects of those wage increases by large retailers have had a trickle-down effect to the rest of the market.

That, you would think, would presumably be getting over in the next year, 18 months as the market adjusts to those rates.

The second element of it is the regulatory.

And this is the smaller piece today, but it's going to get bigger and bigger over the next 3 or 4 years.

There are municipalities like Los Angeles County that went to $12 minimum wage on July 1. The State of California is going to go to $12 minimum wage on January 1 and all these are going to be marching towards $15 an hour average wage.

That will cause pressure on wages for an extended period of time.

Will that reflect in increased retail prices?

Well, at the end of the day, inflation gets into businesses and this industry has shown over time that as inflation comes in, we are able to pass along many of those costs, if not all of them, to the consumer in increased prices.

So that's the way we're thinking about it today.

But it really is unprecedented in my career to see the wages go up to the extent that they have this year.

So my sense is they will continue to be up for a year or so and then it'll be muted from where it is today, but still at elevated levels.

And then, just a follow-up, if I may.

So obviously, fiscal '17 was a tough year.

If that persists longer than what you anticipate, would you contemplate even slowing down your investment profile?

Or do you think that it's prudent in this environment to continue with building the Mega Hubs and the MFD program?

Yes.

I think, unrelated to our performance, our investment profile will slow down just a little bit because we opened a new distribution center in Mexico, a new one in Pasco, Washington and we are in the process of building one in Ocala, Florida and expanding one in Danville, Illinois.

That's kind of onetime effort so that -- much of that CapEx is rolling in over a 2- to 3-year fiscal cycle and that will go back to normal.

Based upon -- I love the fact that 2017 was a really tough year.

We grew earnings per share by 6%.

No, we would not change our investment profile based upon these kinds of results.

We believe in the long term of this business.

As I've tried to articulate earlier, this is not an unusual cycle for our industry to go through.

We saw it back in 2013.

We saw it in 2004 and '05.

We saw it in '98 and '99.

So these things happen.

And over the long term, this business is really, really strong and we expect it to continue to be so.

Our next question is coming from Simeon Gutman of Morgan Stanley.

My first question is clarification or a follow-up to some of the questions that have been asked, maybe for Bill Giles.

If, for 2018, the comps return back to, let's say, 2.5% to 3%, just trying to ascertain the expense run rate and maybe margin for next year, will the EBIT growth look more normal on that basis?

Or there is still some elevated spending in the year?

And as part of that question, if comps are 2.5% or so, 3%, does that entice you to speed up some investments such that you don't see the full flow through anyway?

I don't know if it would speed up the investments.

Obviously, we're going to make the investments on the places for which we believe that we're getting adequate returns on.

And as Bill articulated earlier on MFD as an example, we haven't seen the full results of that, so we pulled back on that a little bit and you saw that show up in some of the margin.

So I think that if same-store sales were to get to 2.5% or 3%, that obviously would improve our EBIT performance.

There's no question about that.

And we'll manage expenses accordingly and we'll make sure that we continue to provide great customer service along the way and we'll make the investments where we believe that we're getting good adequate returns on them and we'll make adjustments along the way.

If we find opportunities where we're getting real benefits and it makes economic sense for us to accelerate investments, we'll do that.

At the same time, we've demonstrated that, where it doesn't make sense, we'll pull back on those investments.

So we're getting hypothetical about the next year, but with the model still intact, and it remains a relatively healthy industry and we feel good about our position out in '18.

Okay.

And then, my follow-up for Bill Rhodes regarding the industry's top line.

I don't know if what is sort of normal for this industry, whether it's 2 to 3 or 3 to 4 or so, but I'm curious if the way you look at the last year is if we're sort of on a glide path down to some new normal that may be less than that 3 to 4, or if the slowdown is cyclical and we should get back to the old normal run rate.

Yes.

I mentioned in our prepared remarks that our last 5-year average same-store sales has been 1.9%.

So from -- and obviously, same-store sales is different than industry growth rate because you have new stores that are driving industry growth rate.

That seems to be what we've experienced as normal over the last 5 years.

But within that number, we also had accelerated growth from commercial.

We were growing, during that period of time, commercial in the low teens.

We don't believe we're going to be running in the low teens in the foreseeable future.

And so I think we'll be challenged even to get back to that 1.9%, but I think we'll get close to it.

Our next question is coming from Bret Jordan of Jefferies.

A question on the quarter.

I mean, I obviously heard a lot of negative feedback in the channel about temperature-related product sales, air-conditioning.

Could you give us some color as to maybe what that AC and recharge product line would mean in your fourth quarter and maybe how negative that category comp was year-over-year?

I don't want to get into specific numbers, but if you put all the AC-related, so radiators, the whole cooling system, combined with the air-conditioning system, combined with AC chemicals, it's a pretty significant part of our business, particularly in the summertime.

In the -- it's in the double digits, for sure.

And it had a very tough period during this summer.

We believe that will -- those things happen over time.

We had a cooler summer, particularly June was really cool, and that will normalize over time and it will come back.

But we've dealt with more weather impacts, really, this year.

And I hate to talk about them, but we can see them categorically in our business so easily.

We've seen the lack of winter weather coming through, the maintenance cycle on brakes and chassis and the like.

And then, this summer, with the cooler winter, we saw it in those 3 businesses.

Okay.

And then, on the online question.

You were talking about sequential improvement, in the online traffic at least, with it driving a fair amount of Pickup In Store volume.

Could you give us a feeling for how much Pickup In Store volume you're actually seeing there because obviously you're not getting booked into the other category?

And then, within AutoAnything, is that performance improving as well?

Or is it lagging autozone.com?

Yes.

I would say on the Pickup In Store business, that remains -- it's a very small portion of our overall business as you would imagine, but it is, by far, the fastest growing channel of distribution that we have and it has accelerated.

And so we think we're doing a great job on that side of it.

On AutoAnything, it's had a little bit more of a challenging year.

We've made some management changes there and we are seeing trends improve there.

So we see business getting a little bit better at AutoAnything.

Okay.

And you're not discounting the online transaction with the Pickup In Store, right?

That's happening at the store price, not the ship-to-home discount?

That is correct.

All right.

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

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

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

We have a solid plan to 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 that concludes today's conference.

Thank you for your participation.

You may now disconnect.