Autozone Inc (AZO) — Q4 2015 Earnings Call Transcript

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, the availability of consumer transportation, construction delays, access to available and feasible financing and changes in laws or regulations. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of our Annual Report on Form 10-K for the year ended August 30, 2014, and these risk factors should be read carefully.

Good morning and thank you for joining us today for AutoZone's 2015 fourth quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer IT and ALLDATA and Brian Campbell, Vice President-Treasurer, Investor Relations and Tax. Regarding the fourth quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today, is available on our website www.autozoneinc.com. Please click on quarterly earnings conference calls to see them. To begin this morning, I want to thank all AutoZoners across the globe for another solid quarter and year. 2015 was a very busy and productive year for us. We continue to grow our business on a variety of fronts. Our U.S retail business expanded again in 2015 with the opening of another 157 net new stores. Our commercial business continues to gain traction, growing sales 12.9% for the year with 296 net new programs open. We now have the commercial program in 81% of our domestic stores, having opened 720 new programs in just the past two years. And we continue to expand our presence in Mexico, where this quarter we celebrated the opening of our 441st store. While opening no additional stores in Brazil this quarter, we opened two for the year and now have seven stores in operation. Lastly, we opened three new IMC branches for the year. We have a lot of runway to open future IMC locations. We currently have approximately 90% of our total Company sales coming from our domestic AutoZone stores. We believe we have great growth opportunities inside and outside of the U.S for many years to come. In 2015, we expanded our online offerings in both our traditional autozone.com and autozonepro.com web sites, as well as autoanything. ALLDATA also continued its expansion in the year. Along with these strategic investments, we spent a lot of time on initiatives to drive our core domestic retail business. DIY remains our number one priority. Our DIY business continues to grow, remains the largest portion of our sales, and continues to generate tremendous returns. We also see significant opportunities for new store growth and improved productivity in our existing stores. As our commercial business continues to grow and is intertwined with our retail business, we’ve continued to identify opportunities to optimize our inventory placement and distribution strategy in order to respond to the ever-increasing challenge of parts proliferation in the industry. Over the past two years, we implemented new methodologies to improve our hard parts placement techniques in all stores. We’ve been testing more frequent deliveries to our stores and expanded parts availability in the mega hub stores. Additionally, we’ve developed a new store prototype that significantly expands the hard parts holding capacity in our stores. All new stores are now opening with this new prototype and we remodeled 93 of our most constrained stores. These efforts have resulted in an increase in our store inventory levels. They’ve also added incremental costs, but sales have justified our investments and offered convincing proof that we’ve been on the right track. Along with improving our local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, provide AutoZoners with a great place to work with opportunities for advancement, and ensure we do it on a profitable basis to provide strong returns for our shareholders. We will be holding our national sales meeting in Memphis next week. All week and again during my address to the team at the conclusion of the event, we’re rededicating ourselves to live the pledge. Our pledge starts with always putting customers first and therefore we’re always looking for ways to improve our model. As our product assortment continues to improve, we feel it is essential to reinstill a passion to say yes, we’ve got it to our customers' needs. To this day, it surprises me how often we have to say sorry; we don’t have that available. Even with our new part additions, too many customers leave our stores without their needs being met. In this spirit to help the customer we continue to make significant systems enhancements and to capture data about our customer shopping patterns across all of our platforms. We understand we have to be able to share information and process seamlessly between our customers, between our stores, commercial shops, phone, and online experiences in order to meet all of our customers' needs. Before getting into specifics on the fourth quarter, I’d like to take a moment to go into detail on our inventory availability test. We’ve concluded our test and determined the framework of our new supply chain strategy. Over the last couple of years, we’ve been testing two specific new concepts, increasing frequency of delivery to our stores, and significantly expanding parts assortments in select stores we call mega hubs. As both of these concepts are a material departure from our long standing successful strategy and both of them increase our fixed cost structure, we’ve been patient. We wanted to ensure that the results we initially achieve were accurate and sustainable. The first test multiple deliveries per week focuses on improving our in-stock position in stores for regularly stocked SKUs. The plan was to replenish our stores from their respective distribution center more frequently. On the last quarter’s call, we said a little over 900 of our 5,100 domestic stores were receiving either three or five times a week deliveries. This was up from the usual once-a-week delivery schedules we’ve historically run. With approximately 21,000 SKUs in an average AutoZone store, we tested increasing the replenishment frequency of these SKUs. Although our inventory turns at a relatively low rate around 1.5 times per year, the vast majority of our SKUs have an on-hand quantity of one. Therefore, given the randomness of demand, there is potential for out-of-stock positions. There are clearly increased costs associated with delivering more frequently; however, the sales lift achieved from our tests have supported increasing the delivery frequency in the majority of the chain to either three times per week or five times per week, depending on certain parameters. It is important to note that our current plans do not contemplate providing this level of service to all stores. It just isn’t currently economically viable everywhere. Over the next 12 months, we expect to roll this increased frequency model to approximately an additional 1,000 stores. We will begin this rollout in the first quarter. Roughly speaking, we’re modeling a gross margin headwind from this initiative of approximately 25 basis points each quarter until we complete the rollout. It will take us a few years to roll out this new strategy. But once it is complete, we expect roughly two-thirds of our stores to have increased frequency of deliveries. As we implement this further, we will continue to monitor our performance and will further refine the stores on this program. The second test that we’re rolling out is a mega hub store concept. We will open and/or expand another handful of mega hubs in 2016, increasing from our current count of five mega hubs. We are very excited about what the mega hubs can represent for us. We will open these locations over the back six months of our fiscal year. As a reminder, these super-sized AutoZone stores carry between 80,000 and 100,000 unique SKUs, approximately twice what a hub store carries today. They provide coverage to both surrounding stores and other hub stores multiple times a day or on an overnight basis. Our sales results thus far in our open mega hubs are exceeding our expectations. We’ve been pleasantly surprised to see the sales generated by the new unique SKU additions, lifting both our retail and commercial businesses. While there are incremental costs to these rollouts such as payroll and fuel to manage the extra deliveries to surrounding stores, we feel their cost deleverage is relatively modest. Our current assumption on this rollout is that we want to experience meaningful deleverage from this initiative in fiscal 2016. Currently, five mega hubs support approximately 750 surrounding stores, and once built out we would expect to have a network of mega hubs in the neighborhood of 25 to 40 total locations. Like the weekly deliveries from our distribution centers, we expect to complete our mega hub expansion over the next few years. In order to support more frequent deliveries to new stores as well as the mega hubs, we expect to open two or three domestic distribution centers over the two or three years. For your modeling purposes, each new distribution center is expected to cost between $40 million to $45 million. At present, we’re in the early stages of planning their openings and don’t expect any distribution center to come online until early fiscal 2017. Fiscal 2016 will incur some capital and operating expenses related to development, but a larger portion of the capital we spend will be in fiscal 2017 and 2018. We are very excited to have reached a conclusion on these strategic changes. We had a tremendous number of AutoZoners who worked this extremely hard and with great discipline. Due to their incredible efforts and patience, we believe we’ve identified the optimum approach for managing our supply chain. In recent years, AutoZone has completed small acquisitions with AutoAnything and IMC. We currently expect our cash from investing in the business this upcoming year to look similar to this past year. Our capital investments are expected to offset the capital used in the acquisitions. To summarize our plans, we expect to rollout more frequent distribution center deliveries and more mega hub locations over the next few years. We also expect to open two or three new domestic distribution centers over this time. While our total use of capital will not be materially different than next year from this past, we do expect to incur an approximate 20 to 30 basis point gross margin headwind from these investments alone. This past fiscal year we faced headwinds to our gross margin and we were able to overcome them and post improvements in each of our quarters. We believe in fiscal 2016, we have opportunities for improvement, but we remain cautious as we know we will experience more significant supply chain headwind. Now let’s turn to our fourth quarter results. Our sales increased 7.9%. Our domestic same-store sales were up 4.5%. This quarter’s sales results were stronger towards the back half of our fiscal quarter than the beginning. While May was the weakest month of comp store performance, the comparison to the previous year’s May was a contributor. May was quite strong the year before. The remaining months were very consistent. We attribute this to consistent weather across much of the country and steadily lower fuel prices. Regionally, the Northeast and the Midwest performed slightly below our overall chain. However, these two markets were slightly better the year before. In regards to our three primary merchandise category splits, failure related, maintenance and discretionary, failure performed best followed closely in growth over the last year by maintenance and then discretionary. We attribute failure strength to more miles being driven across the country and failure occurring with vehicle usage in addition to favorable weather. Both traffic and ticket were positive for our DIY and commercial businesses. We opened 134 new commercial programs in the quarter versus 113 last year. For the year, we opened 296 net programs for the full-year reaching 81% of our domestic store base. While our sales grew 13% on the year, our programs opened grew by 8%. We are proud of our commercial results this year and as our programs continue to mature, we believe our future is bright. As part of our strategy on increasing inventory levels in local markets closer to our customers, this past quarter we opened three additional hub locations and now operate 176. As mentioned above regarding opening more mega hub locations, we do expect to open more standard hub locations as well. Over time, we expect to operate as many as 200 to 225 stores as hubs. But that growth is expected over many years to come. Regarding Mexico, we opened 23 stores this quarter and now have 441 total locations. While Mexico’s U.S. dollar sales were below historic growth rates, we executed well, especially in light of the foreign currency headwinds experienced with the peso. Sales in our other businesses for the quarter were up 2% over last year. As a reminder, our ALLDATA and e-commerce businesses, which include autozone.com and autoanything, make up this segment of sales. Regarding online sales opportunities, there continue to be great opportunities for growth on both a business-to-business basis and to individual customers or B-to-C. These businesses are relatively small for us representing just 3.4% of our total sales mix on the quarter. Overall, we feel like we’re well positioned in 2016 to improve on 2015s results. With the continued aging of the car population, as we continue to be optimistic regarding transferring our industry in both DIY and DIFM. As new vehicle sales are reaching all-time highs and gas prices on average are down year-over-year, miles driven continue to increase. The lowering customer benefits the most from lower gas prices relative to income. This trend is encouraging. I know with our new fiscal year upon us, many investors have asked about our expectations for 2016. For us, our second and third quarter results are more difficult comparisons. However, we’re optimistic we can grow in all of our upcoming quarters. While certain markets outperformed during the winter this past year, others underperformed. We believe we should improve in these regions. As our history has shown, we manage this business focusing on both short-term and long-term performance. And if we felt our sales would be challenged in the short-term due to difficult comparisons, we wouldn’t make material changes to our plans or operations. We will continue to balance short-term and long-term performance and will be keenly focused on delivering consistent strong performance and extending our streak of 36 consecutive quarters of double-digit EPS growth. However, with our delivery frequency initiatives along with expanding mega hubs, we will likely have some headwinds on our operating margin. Now let me review our highlights regarding the execution of our operating theme for 2015. Wow! Every customer everywhere. The key priorities for the year were great people providing great service, profitably growing our commercial business, leveraging the internet, leveraging technology to improve the customer experience while optimizing efficiencies and improving availability. On the retail front this past quarter, under the great people providing great service theme, we continued with our intense focus on improving execution. We’ve continually been upgrading our product content in both our electronic catalogue and online offerings. We’ve also been focused on improving our mobile app to be relevant across our fastest growing online category. We’ve been aggressive on our technology investments and believe these initiatives will help differentiate us on a going-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 our businesses. In regards to commercial, we opened 134 programs during the quarter. For the year, we opened 296 versus 424 last year. Our expectation is we will continue to open new programs and grow our percentage of stores with the commercial program, although our pace of growth will likely moderate. As we continue to improve our product assortments and availability, and as we make other refinements to our offerings, we expect that the estimated sales potential from the market will grow. Our results continue to provide us confidence to be aggressive in adding additional resources and new programs to this important growth initiative. We should also highlight another strong performance in return on invested capital, as we were able to finish 2015 at 31.2%. We are very pleased with this metric and it is one of the best in all of hardline’s retail. However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return, well in excess of our cost of capital. It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we invest is our investors' capital. Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to thank and reinforce how proud we are of our entire organization’s efforts to manage the business appropriately and prudently. We have an amazing team and our initiatives for 2016 are very exciting. With our ongoing supply chain initiatives as well as new store openings, we’re ready to continue to provide Wow! Customer service to all of our customers and we’re ready to continue to prudently manage our cost structure providing our shareholders with the consistency we’ve exhibited in the past. Now I’ll turn it over to Bill Giles.

Thanks, Bill. Good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our retail, commercial and international results for the quarter. For the quarter total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores, and our 20 IMC branches, increased 8.1%. Now switching to macro trends during the quarter, nationally unleaded gas prices started out at $2.69 a gallon and ended the quarter at $2.51 a gallon, an $0.18 decrease. Last year, gas prices decreased $0.21 per gallon during the fourth quarter, starting at $3.67 and ending at $3.46 a gallon. We continue to believe gas prices have a real impact on our customers' ability to maintain their vehicles, and 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 terms of wear and tear. Miles driven increased 2.6% in May and 3.9% in June; we don't have July or August data yet. The other statistic we highlight is the number of seven-year and older vehicles on the road, which continues to trend in our industry’s favor. For the trailing four quarters, total sales per AutoZone store were $1,761,000. This statistic continued to set the pace for the rest of the industry. Now for the quarter, total commercial sales increased 13.1%. In the fourth quarter, commercial represented 18% of our total sales and grew $70 million over last year's Q4. This past quarter we opened 134 new programs versus 113 programs opened in our fourth quarter of last fiscal year. We now have our commercial program in 4,141 stores supported by 176 hub stores. Approximately 1,100 of our programs are three years old or younger. Let me take a moment to discuss our commercial program performance while our average weekly sales per program for the full year were below some peers in our industry had $8,800, our productivity continues to improve. It’s important to highlight that we accelerated our new program growth over the past few years, as approximately 26% of our programs are younger than three years old. These openings have impacted our average sales metric and cannibalized some of our older programs. However, our focus is on growing market share and improving our service levels by having more programs closer to our customers. Looking specifically at our mature programs, those at least five years old, they average $10,000 per week this past year and grew 6.2% over last year. While we will continue to open additional programs over the next several years, we will remain focused on improving the productivity of all our existing programs. We also feel very good about the success we’ve had in profitably growing the commercial business, and we like our trajectory here. With our inventory additions in support of the IMC acquisition, we’re well positioned to grow our base business over the last several years. Our significant focus has been on opening new programs and that will continue to be the case albeit at a slightly moderated pace. We have a very talented sales force and we’re enhancing training and introducing additional technology to optimize the productivity of the sales force. We’ve increased our efforts around analyzing customer purchasing trends and in-stock trends. In summary, we remain committed to our long-term growth strategy. We believe we’re well positioned to grow this business and capture increased market share and we believe we can scale this business in a profitable manner. We continue to be excited about our opportunities in this business for many years to come. Now moving on to Mexico, our Mexico stores continue to perform well. We opened 23 new stores during the fourth quarter and 39 for the full year. We currently have 441 stores in Mexico. This upcoming year, we expect to open a similar 40 new stores and we’re on target to open a new distribution center. This will mark our second DC in the country and support Central Mexico store growth. While sales in base currency were above plan this past year, the devaluation in the peso was much greater than we assumed at the start of the year. The peso devalued 28% over the course of the year. This created a headwind that caused our reported U.S. dollar EBIT to be lower than last year. The EBIT dollar impact on the quarter assuming constant currency with last year’s foreign exchange rate was meaningful approximately double-digit millions of dollars. While we cannot control movements in functional currency versus planned assumptions, we feel the Mexico leadership did an exceptional job managing the peso denominated business. And while we hope more favorable currency compares are in our future in fiscal 2016, we know our Mexico AutoZoners will continue to provide outstanding customer service. If the peso stays at these elevated levels, it will continue to pressure our U.S dollar earnings for the next several quarters. Now regarding Brazil, we opened no stores in the quarter and have seven stores opened at the end of the year. Our plans remain to open a few stores this upcoming fiscal 2016, while sales growth has been very encouraging, we’ve been challenged by a weak Brazilian real relative to U.S. dollars as well. While the peso devalued 28%, the real devalued 60% on the year. We remain in test phase on Brazil, but have been more encouraged of late due to our improved operating performance. And recapping this past quarter’s performance for the Company in total, our sales were $3.290 billion, an increase of 7.9% over last year’s fourth quarter. Domestic same-store sales or sales for stores opened more than one year were up 4.5% for the quarter. Gross margin for the quarter was 52.5% of sales, up 20 basis points. The improvement in gross margin was attributable to higher merchandise margins, partially offset by the impact from higher supply chain costs associated with current year inventory initiatives, and Interamerican Motor Corporation, which was acquired in September 2014. In regards to inflation, it has been down slightly year-over-year. Currently we feel costs will be predictable and manageable. We will remain cognizant of future developments regarding inflation and will make the appropriate adjustments should they arise. Looking forward, we continue to believe there remains opportunity for gross margin expansion within both the retail and commercial businesses, but our commercial business is growing at an accelerated rate and it has lower margins which is adding pressure to our overall gross margins. It is important to note that we do not manage to targeted gross margin percentage. We will understand the headwind from expanding our distribution center deliveries. We work diligently to offset these headwinds with a focus on lower acquisition costs. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment. SG&A for the quarter was 32.2% of sales, higher by 52 basis points from last year's fourth quarter. The increase in operating expenses as a percentage of sales was primarily due to higher legal costs and the impact of the IMC acquisition. The legal costs growth this quarter was attributable to discrete matters that we would not expect to continue. The acquisition of IMC anniversary this month in September, so we expect the majority of the deleverage to dissipate going forward. We continue to believe we’re well positioned to manage our cost structure in response to our sales environment. EBIT for the quarter was $669 million, up 6.2% over the last year's fourth quarter. Our EBIT margin was 20.3%. Interest expense for the quarter was $47.1 million compared with $49.4 million in Q4 a year ago. Debt outstanding at the end of the quarter was $4.620 billion or approximately $300 million more than last year's balance of $4.323 billion. Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR. While in any given quarter we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy; share repurchases are an important element of that strategy. For the quarter, our tax rate was in line with last year’s Q4. We expect our annual rate to be closer to 36.5% on an ongoing basis as the deviation results in primarily driven by the resolution of discrete tax items that arise. Net income for the quarter was $401 million, and up 7.4% over last year. Our diluted share count of 31.5 million was down 5% from last year's fourth quarter. The combination of these factors drove earnings per share for the quarter to $12.75, up 13% over the prior year's fourth quarter. Now relating to the cash flow statement, for the fourth fiscal quarter, we generated $526 million of operating cash flow. Net fixed assets were up 6% versus last year. Capital expenditures for the quarter totaled $188 million and reflected the additional expenditures required to open 97 new locations this quarter, capital expenditures on existing stores, hub and mega hub store remodels or openings, work on development of new stores for upcoming quarters, and information technology investments. For all fiscal 2015, our CapEx was approximately $480 million. With the new stores opened, we finished this past quarter with 5,141 stores in 49 states, the District of Columbia, and Puerto Rico, 441 stores in Mexico, and seven in Brazil for a total AutoZone store count of 5,589. We also had 20 IMC branches opened at fiscal year-end taking our total locations to 5,690. Depreciation totaled $87 million for the quarter versus last year's fourth quarter expense of $79 million, in line with recent quarter growth rates. With our excess cash flow, we repurchased $430 million of AutoZone stock in the fourth quarter. At year-end, we have $348 million remaining under our share buyback authorization and our leverage metric was 2.5 times at year-end. Again, I want to stress, we managed appropriate credit ratings and not any one metric; the metric we report is meant as a guide only as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as a percent of gross inventory finished the quarter at 113. Next, I'd like to update you on our inventory levels in total and on a per store basis. The Company’s inventory increased 9% over the same period last year, driven by increased product placement, new stores during the fiscal year, and the acquisition of IMC. Inventory per location was $610 versus $582,000 last year and $629,000 last quarter. The IMC acquisition increased inventory per location by $15,000 this quarter. Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative $79,000 versus negative $87,000 last year and negative $68,000 in just the last quarter. As a reminder, the addition of IMC has added $15,000 in inventory per location and reduced AP to inventory by approximately 2 percentage points. As we will now be a-niversar-ing the acquisitions, we expect dramatically reduced pressure on these overall metrics going forward. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.2%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now, I'll turn it back to Bill Rhodes.

Thanks, Bill. We’re pleased to report our 36th consecutive quarter of double-digit EPS growth, and for the year the reported EPS growth rate of 14.1%. We also surpassed a historic milestone in 2015, exceeding $10 billion in sales for the first time in our company’s rich history. Our company has continued to be successful over the long run. That success is attributable to our approach of leveraging our unique and powerful culture and focusing on the needs of our customers. To execute at a high level, we have to consistently adhere to living the pledge. We cannot and will not take our eye off of execution. While we study the external environment and react where appropriate, we must stay committed to executing day-in and day-out on our game plan. Success will be achieved with attention to detail and exceptional execution. Before I conclude, I want to take this opportunity to reflect on fiscal 2015. We were able to build on past accomplishments and deliver some impressive results. In recognition of the dedication, passion, and commitment of our AutoZoners, I want to highlight that we grew sales to a record $10.2 billion this past year, and we grew same-store sales at 3.8%. We grew our store base in Mexico and managed our expenses exceptionally well in spite of the foreign currency headwind with the peso. We began our IMC integration, opened three new branches and now have 20 locations. With the minority of our AutoZone stores today able to sell IMC products, we feel we’re well positioned to expand this business in the future. Our inventory availability testing in mega hub store remodels helped us to reach our conclusion and allowed us to announce our planned implementation schedule. I could not be more proud of the tremendous work everyone on this project contributed. And lastly, we will talk more about saying “yes.” We got it to our customers. We are fixated on making sure we meet our customer’s needs in 2016. Our offerings are the best they have ever been, and we are determined to communicate this to our customer base. At the end of the day our customers have choices and we must exceed their expectation. Again we’re excited about our initiatives around inventory assortment and availability, hub stores, commercial growth, Mexico, ALLDATA ecommerce, Brazil and IMC. Our long-term model is to grow new store square footage at a low-single digit growth rate and we expect to continue growing our commercial business at an accelerated rate. Therefore, we look to routinely grow EBIT dollars in the mid-single digit range or better in terms 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’re on will allow us to continue winning for the long run. We believe our steady, consistent strategy is correct. It is the attention to details and consistent execution that will matter. Our belief is solid consistent strategy combined with superior execution is a formula for success. Our charge remains to optimize our performance regardless of market conditions and continue to ensure we are investing in the key initiatives that will drive our long-term performance. In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves. We're pleased with our results this past year, so we must remain committed to delivering on our strategic and financial objectives. I can't wait to sit down and talk to our leadership team at our upcoming national sales meeting. This team is comprised of the best leaders in our industry. We are launching our Live the Pledge theme and I know our leaders combined with our talented teams of roughly 80,000 AutoZoners will do just that. Now we’d like to open up the call for questions.

Thanks a lot, and good morning.

Good morning.

My first question is regarding the new distribution strategy. Obviously you guys have worked really hard to test it; you now have a plan to roll it out, just trying a bit to understand the return dynamics and the financial implications here. So previously you had stated that you expect about $1,000 or $1,500 per week lift per store when all is said and done from this initiative. I want to confirm that’s still on target?

Yes, the target is to achieve between $1,000 and $1,500 per store when both initiatives are fully implemented. However, as mentioned in our prepared comments, approximately one-third of the stores will not receive frequent delivery, which means they will not benefit from this increase. For those stores that do receive both the mega hub and the enhanced frequency of delivery, the expected increase will fall within the range of $1,000 to $1,500. It's challenging to specify a more precise figure at this stage due to numerous variables involved.

Got it. So as you roll this out to 1,000 stores next year, about 20% of your base, it would appear that on a run rate basis that should be driving a boost of comps between 75 and 100 basis points, at the same time you’ll be experiencing some gross margin pressure about 25 basis points, but that looks like a pretty good trade off in my book. It looks like you’ll be growing gross profit dollars from this initiative around $50 million next year on a run rate basis versus about $25 million in gross profit or expenses, I’d say with the rollout, that’s a pretty good return. Is that the right way to think about it?

Well, you did a lot of really good math there very quickly, much quicker than I can do it. I think generically speaking you’re in the ballpark, and we’re not going to go forward with even this business. We think they’re going to provide us with a growth in operating profit dollars that exceeds our return metrics, and we think that both of these initiatives will do that. Now we didn’t think that it would do it in the lowest volume stores with July; we’re not going to roll it for those stores at this point in time.

Got it. Understood and good luck.

Okay. Thank you.

I just wondered more detail on the quarter, and then I had a question about the successful test. For the comps during the quarter, can you talk a little bit about how you did compared to your plans, and if there was a strategy or plan where it did come from?

I think generally speaking that performance versus our plan was pretty much on track, particularly in the retail business. Frankly we had a pretty aggressive plan in the fourth quarter that we were a little daunted about coming into the quarter. May was very soft and we were behind, but June, July, and August outperformed and generally ended on plan.

Okay, thank you. And my second question is just on some of your commentary around your GT build outs and opportunities for new store growth. How should we think about that from a location standpoint? Where are you aiming to build out your stores and with regards to the GT, where could they be located and are you considering where they’re located in relation to how your competitors' supply chains are now?

Sure. As far as today we have distribution centers that can service our current strategy for anywhere in the United States. We’re not prepared yet to talk about specifically where these next two to three distribution centers are; we still have some work to do. But we can service every store today. The reason we need to expand it is one, as we continue to grow our store count, we need more capacity in our supply chain. And then secondly, as we move to increase frequency of deliveries, we need to have some distribution centers that are closer in certain parts of the country and what we’ll be solving with these extra two to three distribution centers.

Okay. Thank you.

Thank you.

Thanks, good morning. Following up on Seth’s question regarding I guess some of the margin trajectory going forward. Bill, you said some of these investments will weigh on margins. You quantified that at the 25 basis points from the multiple delivery, and I think you said very modest de-leverage from the SG&A line from DC. Overall, it doesn’t seem like a big amount. This quarter I think you had that run rate and, absent some of those currency headwinds and legal, you would have seen margins if not up, at least flattish. So, my question is, is there a specific outlook on the margin side? It feels like margins could still go up even with that 25 basis point headwind. Do you agree or are you just trying to just take a cautious outlook ahead of the rollout?

Yes, I think the way I would answer that is that we wanted to carve out at least what the impact was if these initiatives varied specifically, so we said that that was 20 to 30 basis points, the majority of that is in gross margin as you highlighted a little bit of that would be in SG&A to support the mega hub operational activities. Frankly, you’re right; we had about a 24 basis point impact in supply chain for this past quarter which is probably a pretty good way to look at it for the next several quarters as we continue to rollout stores. Now, separate and distinct from that, our merchandising organization has done a terrific job in lowering acquisition cost during pricing optimization, and they’ve done a very good job in offsetting those costs. So I think there are other opportunities for us to continue to improve gross margin rates. But we can clearly identify and quantify the investments and we wanted to highlight those for you. But as we look out over the year, we feel pretty good about overall margin rates, but clearly we’ll have some headwinds.

My follow-up question is about the tests and the multiple delivery tests or the stores you've been operating for a year. Can you provide more details about the traction you're seeing? Bill Rhodes mentioned saying yes more frequently. Are you seeing an increase in the basket size with existing customers? Are you moving up on the call list? Are you attracting new customers who haven't previously done business with you? Could you provide more insights so we can better understand the improvements following the ongoing rollout?

Yes, I would say that we’re seeing positive results in both our retail and commercial sectors. We’re very satisfied with the performance so far. It's important to note that this involves slower-moving inventory. When customers reach out to us and we have the items in stock, we can fulfill those sales quickly since we've not seen any significant buildup in inventory over time. I hope that as we continue to say yes to our commercial clients, they will increase their frequency of orders with us. This ties into the increased delivery frequency. As for the mega hubs, they represent a significantly different offering in the market. I believe that by exceeding the expectations of our commercial customers in both retail and commercial sectors, we are gradually gaining traction.

Okay. Thanks.

Okay. Thank you.

Yes. Thanks. Good morning, Bill.

Good morning.

So, when you think about the eventual distribution of work of 11 DC than 40 mega hubs, AutoZone’s capital investment in distribution will still be less than half of competitors like O’Reilly and NAPA. When you think about the end game a few years out, how will the parts coverage compare to those competitors? When will it be significantly better than what AutoZone has had in the past, but if you are to benchmark it, I guess those competitors that made that much larger investment, what will be the difference?

I believe we will be leading the industry in accessing inventory. With our delivery frequency of three to five times a week, we can effectively manage in-stock levels. We face two main challenges: the need to maintain stock in times of low demand and the risk of being out of business for eight days if demand suddenly spikes without a higher delivery frequency. We are confident that our model with 10 to 11 distribution centers will help us achieve this efficiently. While we might miss a few sales occasionally, our priority is to ensure a solid return on our investments that meets our expectations. Additionally, with the establishment of 25 to 40 mega hubs, we aim to enhance parts availability significantly, offering local market access to 80,000 to 100,000 SKUs. This will benefit both our retail and commercial customers with same-day availability and support overnight transfers to other hub stores, creating a top-tier solution.

So if you think about the potential for an extra $1,500 of revenues per week per program where both of the initiatives are in place. Your commercial run rate is still about $200,000 less per program, let’s say compared to O’Reilly. Is the difference the fact that it’s going to take a multiple number of years for your customers to recognize that your capabilities are greater or we’re not factoring, perhaps there’s going to be a need to a large or a number of salespeople at AutoZone, but I would think that the upside could actually be more than the $1,500 that you’re suggesting?

Well first of all, we mentioned $1,000 to $1,500 Dan, but I appreciate your optimism and I hope you’re right too. I hope the upside is even higher. Our testing hasn’t confirmed that yet, but as I mentioned earlier, over time, when you consistently say yes to your commercial customers, especially for hard-to-find parts, their confidence in you will grow, which could lead to a positive long-term effect. This is a significant improvement for us, but it’s not a quick fix. We still need to refine our go-to-market strategy, ensure we have the right product offerings, and confirm that we have the best sales force, which I believe we do. It will take time, but we are actively closing those gaps.

Okay, great. Thank you.

Good morning. Thank you for taking my question. Bill, as you look at your industry over the next few months, it seems like the low gas prices are likely to continue. The weather could be unusual based on some predictions. What do you think will have a greater impact on demand for the industry: gas prices or the weather in the coming months?

From a consistency perspective, gas prices have clearly had a significant impact on us. They have increased disposable income for our customers and contributed to a rise in miles driven, with current figures showing historically high levels compared to the past. These two factors, along with the age of vehicles, are likely to support long-term demand for the industry. However, predicting weather patterns remains challenging. While we experienced some favorable conditions in the fourth quarter, it is difficult to forecast what lies ahead. Nevertheless, the trends related to gas prices appear to be positive for the industry.

Okay. And then following up on the inventory strategy that you’re pursuing, I think the market has come to expect a lot of flexibility in your cost structure where sales gyrate from quarter-to-quarter, you’re still able to produce the type of earnings that you have. Did the new inventory strategy reduce that flexibility such as, if the sales don’t come through, the margin performance could be more at risk?

I guess theoretically that’s probably true because we’re adding some increased fixed cost structure to the organization. But at the same time, as you pointed out, we’ve been very good at determining how to manage our overall cost structure given the environment that we’re dealing with. Having said that, we’re committed to this initiative and we’re very encouraged by and we’re going to see it throughout.

Okay. Last quick one, a few years ago you were decreasing your share count year-over-year by a high single digit pace as moderated into a more like a mid single digit pace. Is that a reasonable rate to expect moving forward?

I think so. I mean, it’s obviously dependent on the PE. So, as our PE has gone, obviously our share repurchases as a percent is declined I think to mid-high single digits to just this past quarter 5%. So it’s going to continue to be a very important part of our capital allocation strategy and it’s going to be a very key element of us driving EPS growth. We’ve got a nice balance of organic EBIT growth and share repurchase to drive EPS and I expect that to continue in the future.

Cool. Thank you so much.

Thank you.

Thanks a lot. Good morning and I appreciate all the additional information on the call today. My first question relates to this quarter, I’m just trying to understand some of the improvement. It looks like commercial saw more acceleration and Bill you gave us that 6.2% increase from mature programs. Can you tell us how that 6.2% compares to what you’ve done over the prior quarter or two and to what degree do you think the improvement you generated, I think commercial, is it all a function of some of that, the early testing and rollouts that you’ve been implementing on the inventory and help side?

I’d say the 6.2% is probably a bit of an acceleration and as we highlighted that’s on our mature programs. So we’ve seen a little bit of acceleration on that and with some of the other questions we were going through on commercial, some of that relates to some of the things that we’ve done around inventory availability and inventory initiatives. But keep in mind, we’ve got several initiatives in our commercial programs and we’ve got a lot of things that we’re working on in order to continue to drive that average weekly sale or average dollars per program every day. So it’s not just inventory availability initiatives, although that’s been helpful.

Great. Second question, as we model out the gross margin or the aggregate margin impact of the supply chain investments. You spoke about approximately 25 basis points year-on-year. Is that 25 basis points each year incremental to the prior year until the rollout is essentially done?

Theoretically yes, although my guess is that as we get past a year or 18 months that we’ll be able to dissipate some of that impact with improved sales performance and other tactics to improve margin rates.

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

Yes, I think that’s a good question. I think right now we’re at 1.5 times turn, and so if we can kind of keep it around that number, I think the vendors should be able to support our AP inventory ratio where it is.

Okay. Thanks so much guys.

Thanks. I had some housekeeping and a strategic question, but first on the housekeeping. If I understand correctly, the capital expenditures are likely to rise to about $600 million considering the mergers and acquisitions, and then it should increase slightly more into 2017 since that’s when the distribution centers will actually open. Did I interpret that correctly regarding the cash flow?

Yes, Greg I think you’re pretty close on that on the $600 million, there may be a little of an increase over that. We’ll have a little bit of DC dollars in ’16 but more on ’17?

Okay, great. And then, I just want to make sure on strategic side, and in your prepared comments I heard you guys mention the new hard parts replacement techniques. Can I assume that’s all part of the mega hubs and the expanded availability. But what is, is that all that is, or is there something else going on there? It sounded like it might be a new software system or algorithms you run to figure out where to put those parts or am I reading too much into that?

Yes, Greg, I apologize for not being clearer. The work we completed about a year to a year and a half ago involved updating the algorithms to strategically place forward inventory with an emphasis on newer products and vehicle life cycles. This work has been in place for approximately a year and has been successful. We are now applying those same methods to organize our mega hubs, and as we continue to deploy them, we will use that methodology.

Got it. And then as part of that, that 21,000 SKUs per store, it sounds like as this plays itself out with more daily replenishment. Your plan is not to change that; that would have been shifted a couple of years ago with these algorithms. This is now just making sure you’re in stock faster.

That is exactly correct. We’ll modify our SKU count by category every time we do a category update. But the step function change in what we were going to stock in the store has been done. Now we’re going to make a step function change in 70% of the stores on how frequently they receive their replenishment orders.

Lastly, if I could follow up on that, how does this change impact your strong private label program and the brands you've developed, particularly Duralast, when we consider the next three to five years?

Yes, great question. It will have zero bearing on our merchandise strategy and branding strategy. Duralast has been a terrific strategy for us and it will continue to be so.

Great. Thanks a lot.

All right. Thank you.

Thanks. Good morning, guys.

Good morning.

I would like to understand the areas of higher fixed costs related to the new inventory initiatives, and maybe some insight on how much your cost structure will increasingly become fixed over time, possibly in relation to total costs.

Probably I’ve got two things going on, one of which is it will open three distribution centers over the next several years, so that will increase the cost structure. We believe that obviously replacing those distribution centers will reduce the transportation cost, so hopefully that will offset it. And then there will be some increased transportation equipment if you will of tractors and trailers in order to increase delivery frequency, so those are the costs. They’re not overly significant, but you’re adding some capital into the equation.

The ability to be flexible with the rollout of the mega hubs and the increased delivery frequency could allow for a quicker acceleration if we see more success. Conversely, if the environment weakens, we have the option to scale back those plans.

On the margin, absolutely, but obviously there’s a lot of work involved in increasing the delivery, like I said there’s transportation required, people required and then the same on the mega hubs we’ve got to find the real estate and expand the locations or create a new location. So, there’s some lead time in being able to do this and do it in an efficient profitable manner.

And then last question, in case I missed it. Did you mention how many stores currently have both mega hub and increased frequency and how do you think about the percentage of stores that will have those long-term? Thanks.

Yes, we specifically said we’ve got about 900 stores on the increased frequency of deliveries and from our five mega hubs we have about 750 stores that are being serviced by those. I don’t even know off the top of my head how many of them have both. Over the long run, about 70% are going to have increased frequency of delivery. And the majority of the stores are going to have mega hubs. But ones that are in remote locations or small volume stores won't have either one of those.

Thanks very much.

All right. Thank you.

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 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’re confident AutoZone will continue to be very successful. We thank you for participating in today's call.