AutoZone Inc AZO
Q2 2010 Earnings Call Transcript
Transcript Call Date 03/02/2010

Operator: Good morning and welcome to the AutoZone Conference call. Your lines have been placed on listen-only until the question-and-answer session of the conference. Please be advised, today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will AutoZone's second 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, 11 a.m. Eastern Time.

Before Mr. Rhodes begins, the Company has requested that you listen to the following statements regarding forward-looking statements. Certain statements contained in this press release are forward-looking statements. Forward-looking statements typically use words such as 'believe,' 'anticipate,' 'should,' 'intend,' 'plan,' 'will,' 'expect,' 'estimate,' 'project,' 'positioned,' '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, 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 29, 2009, and these Risk Factors should be read carefully.

Mr. Rhodes, You may now begin.

William C. Rhodes, III - Chairman, President and CEO: Good morning, and thank you for joining us today for AutoZone’s fiscal 2010 second quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer, Store Development and IT; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the second 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.

We are pleased to announce for the quarter an EPS increase of 21.2% and a domestic same-store sales increase of 1.0%. We believe the initiatives we put in place surrounding our hub store enhancements, hard parts additions, especially our late model coverage, disciplined category line reviews, our leadership training of store managers, our ongoing development of an effective commercial sales force, enhancements to our Z-net technology, and our store refresh efforts have continued to allow us to grow both our sales volumes and more importantly our market share in both the DIY and do-it-for-me segments.

Furthermore, we believe these initiatives are building momentum in our business. As we began this quarter, we were cognizant that our comparable sales - same-store sales results would become more challenging. As you recall, it was the second quarter last year when our sales began to increase. While we were cautious going into the quarter about our sales comparisons, not knowing how weather and consumer buying habits would play out, we were confident that the actions and strategies we were implementing would be highly valued by our customers during these challenging times.

As we said on our last call, we didn’t see anything on the horizon that would cause a material change in consumer buying behavior. Simply put, we did not anticipate new car sales, gas prices or employment statistics to change materially over the last few months and clearly they have not. Our customers continued to buy our products similarly to the previous 12 months. With the economy remaining challenged, we continued to expect our customers to look at AutoZone to provide them with all their vehicle solutions through our offering of high quality products at a good value supported by trustworthy advice.

With respect to the weather, it is fair to say that the weather conditions were more harsh throughout much of the United States in comparison to the prior year. Although cold weather is positive for our business, it remained wet and certainly towards the end of our quarter much of the country experienced heavier than normal snowfall, which in some cases may have impacted customers’ ability or desire to reach our stores. Having said that, over time weather averages itself out and we are always going to have some positive or negative effect from the weather. The important factors for us are that we take care of our customers and continue to capture profitable market share.

I want to take a moment to congratulate our AutoZoners on delivering our fifth straight quarter of 20% plus EPS growth, and our 14th straight quarter of double-digit EPS growth. This long stretch of success can be attributed to a simple and clear strategy of delivering exceptional customer service and trustworthy advice, all while continuing to refine our retail, commercial, Mexico and ALLDATA offerings. These important qualities are embedded in our culture and they are the principles we live by every single day. It is again worth noting that our stretch of 14 straight quarters of double-digit EPS growth have occurred in very different macroeconomic cycles. Through both boom and bust cycles, our organization has performed very well and our Company's financial performance has been quite strong.

I also want to point out the successes we're seeing in our commercial business. This quarter now marks the 11th consecutive quarter of sales growth. We are pleased with the gradual acceleration that we're seeing as our commercial business grew 8.5% this quarter, a sequential improvement from last quarter's 7.7% increase. Our growth was driven primarily by our up and down the street customers. These smaller usually independent garages continue to show double-digit sales improvement for the quarter.

We feel the progress we've made with this customer segment reflects the enhancements we've made to our overall business model and those changes are positively impacting our customers and their purchasing behaviors. Our improved product offerings and the difference our sales force is making is exciting for our organization. We feel we're very well positioned to further capture market share in this business in future quarters and years. Additionally, I would like to congratulate the organization for delivering another strong performance on return on invested capital as we were able to grow this metric to 25.2% on a trailing four-quarter basis. It is important to note that during 2009 and continuing for the first half of fiscal 2010 we've made substantial investments in our business, both operating expense investments and investments of capital, working capital and capital expenditures, to strengthen our position in the marketplace. During these times of investment, we’ve expanded our return on invested capital. This gives us great confidence in our planning models to confirm that where we have invested your dollars, we are getting an adequate return. We will always maintain our diligence regarding capital stewardship.

Now, I’ll discuss our quarterly performance in a little more detail and try to address questions you may have. Let me begin by discussing category sales. In recent quarters, we provided more detail on the performance of our categories and clusters we have called out as failure, maintenance and discretionary. In recent quarters, our acceleration has come from maintenance and failure categories offset by pressures in the discretionary categories. This quarter our performance was more balanced, although our failure related categories were our top performers.

From a regional perspective, we did not experience any material changes in sales trends that differed from the overall chain performance. Based on NPD market share, we continue to see market share gains in both retail and commercial in virtually every geographic segment. Our competitors, both large and small, continue to be very strong and formidable, and it is incumbent on us to execute at an extremely high level and flawlessly execute our enhancement initiatives to continue to earn these market share gains.

As I mentioned earlier, we have several initiatives underway at various stages, but I’d like to highlight the performance of our hub store enhancements. Last year we implemented an enhanced model in 60 of our 143 hubs. Through the second quarter, we have completed an additional 22 implementations. This effort includes adding additional inventory and increasing the frequency and reach of our daily deliveries to satellite stores.

While this initiative represents a material investment both in terms of operating expenses and some capital, we are quite pleased with the sales performance we are experiencing. The incremental parts additions that are now sold throughout the surrounding satellite stores are both exceeding plan and adding to the overall sales performance of the hub store and its market. With approximately 60 hubs left to convert, we’ll manage those roll outs accordingly. We are learning as we go, so the remaining roll out schedule will be appropriately paced.

Overall, our gross margin rate remained healthy and showed improvement this last quarter. I would like to congratulate our merchandising team on their efforts to improve merchandise margins through lower procurement cost, import initiatives, and price optimization efforts. We continue to feel that margin opportunities exist for us heading into the second half of this fiscal year.

I would also like to recognize our organization from our loss prevention team, to store operations, merchandising, information technology, finance and supply chain for their diligence on reducing our shrink expense. They have worked tirelessly to combat this never-ending waste and their efforts are beginning to payoff.

From an expense standpoint, while we continue to accelerate some of the initiatives that we’ve been testing, we also managed our overall expense structure appropriately as sales increases moderated. This organization takes great pride in our disciplined approach to managing our cost structure and leveraging our culture of thrift and this quarter’s performance further solidifies that this team is highly capable of effectively managing cost. I believe we continue to be well positioned to manage our cost structure for the foreseeable future.

As noted previously but worthy of highlighting again, our commercial business trends remain positive as we continue to build our internal sales force, refine our parts assortment, and focus our efforts on our most profitable customers. With 8.5% growth this past quarter, we expect this business to be a continuing source for sales and earnings growth for many years to come. While we are encouraged by our current performance, we are not satisfied with our current sales levels. We continue to feel confident in our strategy and we look forward to capitalizing on this tremendous opportunity for the remainder of 2010 and beyond. I'd also like to congratulate our Mexico team for opening their 200th store this past quarter. While we've been methodical with this business over the years, it’s exciting for our entire organization to reach this important milestone. Congratulations to our entire Mexico team for achieving this important milestone.

Now I'll take a few moments to talk more specifically about our retail, commercial and Mexico results for the quarter and then Bill Giles will review gross margin result, operating expense result, balance sheet and cash flows. For the quarter, total auto part sales increased 4.1% versus last quarter's 7.7% and last year’s second quarter of 8.1%. This segmentation includes both our domestic retail and commercial businesses and our Mexico stores. Mexico's pesos and dollar converted sales were positive for the quarter. The exchange rate was generally neutral this quarter after having been a significant headwind for most of fiscal 2009.

Regarding our domestic business, during the second quarter we continued to focus on driving sales and profits through improving the customer experience. This quarter we updated 14 of our 40-plus major merchandise categories, and we remain committed to completing at least one line review per major category on an annual basis. Our vendors have worked diligently with us to refine our merchandise assortment as a core element of improving our ability to say yes more frequently to our customers with specific emphasis on adding late model coverage. Parts proliferation continues to present a challenge to our industry, but to combat it appropriately we remain committed to the timely executed merchandise assortment updates and we will continue to leverage our hub stores to ensure we have the required level of coverage to serve our customers well.

I’ll break my comments regarding retail sales up into four major categories. Specifically I’ll address first our new hub store operating market model, then we’ll touch on our best of the best leaders, third, I’ll spend a moment on our marketing themes slated for 2010, and finally, I’ll address the macro trends we’ve seen.

Although I previously mentioned our hub strategy, let me take a moment to highlight this quarter’s activity. We converted an additional 11 hub stores to our new operating model during the second quarter, increasing the frequency of delivery to our satellite stores and refining or rather increasing the hard parts assortment. Today, we have converted 82 of our 143 hubs to this new model. Along with our ability to say yes more frequently to our customers, the enhanced hub offers us the ability to improve the productivity of inventory, particularly slow turning inventory. We no longer have to retain certain slower moving products in each of our satellite stores, because we can now access the slower turning SKUs from hub stores thereby reducing working capital.

Currently, we are redeploying these inventory investments to add more late model products. We have plans in place to continue to implement this new model in our remaining hub stores and we continue to refine this relatively new operating model to make it more effective and efficient.

Second, trading continues to be a key priority to improve customer service and increase sales. This past quarter we recognized the best of our commercial and retail AutoZoners with induction into our Sales Leadership Council, and we held a celebration to recognize these best of the best performers. We are intensely focused on learning from these peak performers in order to cross-pollinate their great ideas and best practices throughout the rest of the organization. Over the long run it is our culture that differentiates us and positive reinforcement is a vital element of our culture.

The third item focuses on our customers. An in-depth understanding of our customers is critical, and we are relentless at continuing to learn more about our customers and leverage those learnings to enhance their experience with us. We are experimenting with segmenting our marketing messages to different customer sets. We need to make sure we are communicating our complete value proposition to a wide range of customers while also communicating specific value propositions to specific customers.

Secondly, we have increased our focus on search and display initiatives in an effort to exploit the power of the Internet; and third, we will remain heavily focused on radio advertising as we are one of the largest radio advertisers in the U.S. today.

Regarding macro trends, during the second quarter unleaded gas prices started out at $2.64 a gallon and remained static finishing at $2.61 a gallon. We believe gas prices have not been a material story to our sales results over the last quarter, although we are cognizant of the price increases during last year’s third quarter. Last year’s second quarter ended at $1.96, flat with the year’s Q1 prices. However, prices grew starting in Q3 last year, up to $2.31 a gallon. Unfortunately, current prices remain above last year’s level, but they appear to be stable.

Regarding miles driven, we noted improvements for November and December. However, we expected these increases as gas prices stabilized and the comparisons became easier. Whilst recently we have seen minimal correlation in sales performance with miles driven, historically it has been one of the key statistics which correlate to our sales result over the long-term. The other is a number of seven-year old motor vehicles on the road, which continues to trend in our industry’s favor.

Regarding weather, we believe it had a negative impact on our results, especially last week or so of the fiscal quarter due to heavy snowfall across the country. For the trailing four quarters, total auto part sales per square foot were $241. This statistic continues to set the pace for the rest of the industry.

Now we'll turn to commercial, for the quarter total commercial sales increased 8.5%. We remain encouraged by the consistent progress we have made demonstrated by the gradual acceleration in our sales performance over the past several quarters. While we have made meaningful progress in building and training a world-class sales organization, we recognize that there is still significant work yet to be done to achieve our goals.

As we analyze our commercial sales growth across the country, we were pleased to see growth has come from both existing and new customers. As we continue to increase market share, we continue to enhance our selling capabilities and improve our parts offering. With improved tools in place combined with constant enhancements, we're building a platform for long-term growth.

We now have our commercial program in 2,321 stores supported by 143 hub stores. During the quarter we opened 9 additional programs. Our main focus remains on building and developing a sales force. Over the last 36 months we built our sales force from basically zero. We are targeting sales growth through first increased penetration of existing customers and second on acquisitions of new customers in our existing service radius. The majority of our business is derived from up and down the street customers who experienced double-digit sales growth during the quarter.

Additionally, we continue to work closely with our national account customers and have developed a strong business relationship with many of them. We remain committed to growing this business profitably and constantly ensuring that our investments are resulting in improved sales and profitability. This past quarter, we were successful in growing both operating margins and dollars for our commercial business. We continue to believe more intense personal focus on existing account management will drive continued improved results.

Lastly, we continue to test our one (team) concept in a few locations. Our goal is for our store AutoZoners to support both sides of the business. We are looking to create common systems that are intuitive to operate across both businesses. We believe this has the potential of utilizing our store labor hours more effectively, thereby garnering better coverage and support for both types of customers. As this remains in test phase, we won’t say much more this morning, but we are excited about the future potential of the strategy. In summary, we remain excited about the growth prospects of our commercial business heading into the third fiscal quarter of 2010 and beyond.

Our Mexico stores performed generally on plan this past quarter. We opened 9 new stores during the second quarter and currently have 202 stores in Mexico. Exchange rates did not play a material part in the business’s financial results this past quarter as it did in the second fiscal quarter of last year when the exchange rate jumped to 13 pesos to the dollar. We continue to see our business model perform well in Mexico and remain committed to growing this business and we’ll continue to grow our store count on a percentage basis generally consistent with the last couple of years. We believe that we have an appropriate strategy to manage our Mexico business for the long run while minimizing foreign currency risks. Our ongoing commitment remains to prudently and profitably grow the Mexico business.

Now I’ll turn it over to Bill Giles to discuss the remainder of the income statement, cash flows and balance sheet. Bill?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: Thank you, Bill. Regarding the second quarter for the 12 weeks ended February 13th, we reported sales of $1.5 billion, an increase of 4% from last year’s second quarter. Same-store sales or sales for stores opened more than one year were up 1% for the quarter. We experienced sales growth from both our retail and commercial customers. Net income for the quarter was $123 million, an increase of 6.4% versus last year’s second quarter and diluted earnings per share increased 21.2% to $2.46 from $2.03 in the year ago quarter.

Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters, up 25.2%. We’re proud to report that this metric continues to improve over last year’s already industry-leading rate. Return on invested capital is a key measure of our success. We have and we’ll continue to make investments that we believe will generate returns that significantly exceed our cost of capital.

Gross margin for the quarter was 50% of sales, up 36 basis points compared to last year’s second quarter. The improvement in gross margin of 36 basis points was positively impacted by a favorable shrink expense comparison of 17 basis points, a shift in mix of sales to higher margin product, and lower product acquisition cost. We continue to not see a material shift to our good level categories from our better and best categories.

Our Duralast, Duralast Gold and Valucraft product lines continued to show sales increases in both our retail and commercial businesses. Our customers continue to recognize the value proposition these high quality brands offer. We continue to spend marketing dollars to promote our brands as we feel they can create real competitive advantages for us on an ongoing basis. Looking forward, we believe there continues to be opportunity for gross margin expansion. We do not manage to a targeted gross profit margin percentage, however, as our key focus is on increasing absolute gross profit dollars.

SG&A for the quarter was 34.7% of sales, down 11 basis points from last year's second quarter. The reduction in operating expenses as a percentage of sales was a result of tighter expense management, partially offset by 25 basis points of expense from the continued investment in our hub store initiative. As discussed in last quarter's results, this quarter also included an increase in pension expense of approximately $2.8 million or approximately 20 basis points, which reflected the decline in value of the underlying assets of the plan. It is our expectation that we will incur a similar expense increase in the upcoming third and fourth quarters of fiscal 2010. Offsetting these expenditures we experienced a gain similar to many other retailers related to the final Visa/MasterCard settlement, which for us amounted to $2.5 million or 17 basis points for the quarter. We will continue to appropriately manage our expenditures to enhance the customer experience while being fiscally prudent.

EBIT for the quarter was $230 million, up 7.3% over the last year’s second quarter. Our EBIT margin improved 47 basis points versus the previous year's second quarter. Interest expense for the quarter was $36.3 compared with $31.9 million in Q2 a year ago, a 13.8% increase. Much of this increase was due to a combination of terming out a majority of our commercial paper borrowings in late June and the additional costs associated with our new three-year revolving credit facility and to a lesser degree increasing our debt outstanding by 3% versus last year. We would expect that higher interest expense run rate to continue for the balance of the fiscal year.

Debt outstanding at the end of the quarter was $2.775 billion or approximately $84 million more than last year’s balance of $2.691 billion. Our adjusted debt levels at 2.5 times EBITDAR is in line with past quarter’s results. As we have previously stated, our objective is to manage our debt levels to maintain our investment grade debt rating and at 2.5 times adjusted debt-to-EBITDAR. We feel comfortable in our abilities to adhere to that goal over time. However, it is our expectation that in any given quarter, this may increase or decrease based on management’s opinion regarding debt and equity market conditions. We purposely manage our capital structure relative to our cash flow in order to maintain our credit rating to the investment grade while optimizing our cost of capital.

For the quarter, our tax rate was approximately 36.4%, in line with last year’s second quarter. For the third quarter, we expect to run a higher rate closer to 37%. Net income for the quarter of $123 million is up 6.4% versus the prior year’s second quarter. Our diluted share count of 50.2 million was down approximately 12% from last year. The combination of these factors drove earnings per share for the quarter to $2.46, up 21.2% over the prior year’s second quarter.

Relating to the cash flow statement, in the second quarter we generated $119 million of operating cash flow. We continue to see opportunities to increase operating cash flow going forward. We repurchased $88 million of AutoZone stock and at the end of the second quarter we had $517 million remaining under our share buyback authorization. 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. We reported an inventory balance of $2.3 billion, up 3.3% versus the Q2 ending balance last year. On a per store basis, we were down 1.2% at $504,000. We feel our enhanced hub model will allow us to continue to manage our inventory levels more efficiently. We do, however, expect to offset some of these inventory reductions with new hard parts coverage.

Accounts payable as a percent of gross inventory finished the quarter at 94.8% versus 90.2% in last year’s second quarter. For the quarter, total working capital was a negative $101 million versus last year’s balance of a positive $112 million. Net fixed assets were up 5.1% versus last year. Capital expenditures for the quarter totaled $58 million and reflect the additional expenditures required to open 33 new stores this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters.

Specifically related to new store openings, our new stores remain on track and we continue to see opportunities to open domestic stores at a low-to-mid single-digit growth rate for the foreseeable future. We believe opening stores during these more difficult economic times can be beneficial. We opened 24 net new domestic stores in the quarter for a total of 4,289 stores in 48 states of the District of Columbia and Puerto Rico. Depreciation totaled $44.5 million for the quarter, in line with last year’s second quarter expense of $41.8 million.

AutoZone continues to be one of the few players in our industry to have investment grade debt ratings. Our senior unsecured debt rating from Standard & Poor’s is BBB, and we have a commercial paper rating of A2. Moody’s Investor Services has assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P2 and Fitch has assigned us a senior unsecured rating of BBB as well and a commercial paper rating of F2.

Now I'll turn it back to Bill Rhodes.

William C. Rhodes, III - Chairman, President and CEO: Thank you, Bill. We managed our business very well during the second quarter. We executed our plan and we had very few surprises. We're encouraged with our execution and excited as we head into the back half of our fiscal year. Our stores’ appearance looks great, the morale of our field organization is very high, and we're committed to providing the outstanding service and trustworthy advice our customers deserve. We remain focused on our key priority stated at the beginning of the fiscal year; number one, relentlessly hiring, retaining and training our AutoZoners to make sure we're delivering on our stated corporate goal of providing the best trustworthy advice; secondly, continually refining our product assortment in order to meet all our customers’ needs; third, deploying inventory appropriately across our network with specific emphasis on utilizing our hub and satellite network of stores; fourth, commercial sales growth; with a pay-as-you-go mentality, improving our business with up and down the street, national account and public sector customers, we will continue to develop our sales team in order to make this happen. Finally, we'll continue to test our blended store concept, our (one team) initiative. We believe there can be real power in managing our stores as one cohesive unit. This will only strengthen our service levels to all customers. As we remain on track with all of these initiatives, we promise to continue our focus on innovation and improving every aspect of our business. We remain focused on steady, profitable sales and earnings improvement. We had a very good quarter, which again is worthy of congratulating our entire organization for their commitment to living the pledge. However, we will not rest on our laurels. Our approach remains consistent. We are focused on going the extra mile in 2010, and we will remain and we remain very well positioned to do just that.

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

Transcript Call Date 03/02/2010

Operator: Alan Rifkin, Bank of America.

Alan Rifkin - Bank of America Merrill Lynch: Bill, I’m trying to assess the benefits of the 82 hub stores that have now been converted. Whether it’s sales per square foot on the commercial side or number of commercial accounts added, can you may be shed a little bit color on how the profitability of those 82 stores compares to the 60 that have not been converted and what will be your conversion schedule for the remainder of the fiscal year?

William C. Rhodes, III - Chairman, President and CEO: Yeah. Alan, firstly, I want to make sure and make clear is a big part of the benefit of the hub stores not only comes in commercial, but the biggest part of it comes in the retail side of the business. As far as those stores – as we’ve gone through and refined the operating model on those 82 stores, we’ve also increased our operational focus on the balance of the stores. So we are seeing tremendous benefits out of the 82, but even the stores that have not yet been converted are seeing very nice improvements in their sales penetration across the markets. As far as profitability, we really aren’t prepared to disclose the profitability parts of it, but we would not be continuing to roll it out as aggressively as we have, if they were not significantly profitable and certainly meeting our internal rates of return. As far as the roll out going forward, we are continuing to monitor that. We’ve rolled out 22 so far this year. We had a plan to be fairly methodical about it. We are continuing to evaluate that to see as the results come in as strong as they have if we might want to consider going a little bit faster.

Alan Rifkin - Bank of America Merrill Lynch: Okay. And Bill as a follow-up, maybe for Bill Giles. Bill, you said that there was (strong) opportunity to increase gross margin. Going forward, do you think that those incremental gains will come predominantly from shrink or continuing to lower your procurement cost or what are mix benefits there?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: I think it’s really on the latter part. I think that we’ve done a great job from a shrink perspective and be able to lower our shrink expense. But as we look on a longer term basis, I think we’ve done a good job (as fairly related part throughout that’s helped) from a mix perspective improve our margin and the merchandising team continues to do a good job with lowering our acquisition cost, which we think will also benefit on a longer-term basis.

Alan Rifkin - Bank of America Merrill Lynch: Okay, and then just one more question, if I may, for Bill Rhodes. Bill, you continue to increase your hard line industry operating margin and it appears that it’s actually increasing in the last couple of quarters at an accelerated rate. I know that you’ve always been reluctant to give guidance, but with the year-end operating margin north of 17%, what are the long-term opportunities do you think? I mean, do you think ultimately you can get your operating margins up another 100 or 200 basis points?

William C. Rhodes, III - Chairman, President and CEO: Alan, obviously I think that’s a million dollar question. And I think it’s important to go back and say what we’ve said in the past. Our objective is not to target a specific operating margin percentage. Our objective is to grow operating profit dollars as fast as we can and make sure that we get good returns on those investments. We could see a time where our operating margin could go down if we could significantly accelerate some part of our business that wasn’t as profitable on a percentage basis, but provided us 15% returns we’d be willing to do it. So, what I would say is, we’ve been fairly consistent. Since 2006 when we went through our reinvestment program, we said it was a one-year reinvestment program and it has in fact done that. We increased it slightly since that point in time, and we're going to do the best that we can do. But what does the future hold, I really don't know.

Alan Rifkin - Bank of America Merrill Lynch: Okay, and do you think that your SG&A rate can, over the course of time, go back to sub-30%, which is where you were 10-12 years ago, if you get the productivity gains that you're anticipating?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: Alan, again I think that what we're really focused on is making sure we make the right investments, continue to capture market share, grow top line, accelerate the commercial side of the business, focus on ultimately driving EPS and driving ROIC. So rather than getting to a specific rate and I appreciate the question, and for us it's really about making the right investments that resonate with the customers on a long-term basis, both retail and commercial, capturing market share, and driving ROIC.

Operator: Matthew Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: First of all, on the sales front, looking at the split between DIY and commercial in the context of their overall same-store sales increase, it looks like commercial was - rather DIY was essentially flat. Granted that’s against a tough compare, but you run those compares for another couple of quarters. I guess I'm interested in understanding your view on whether we're sort of back to trend line growth in the DIY market and to the extent that you certainly held your gain share based on your accounting from NPD, whether you think that that is in fact a flattish market going forward?

William C. Rhodes, III - Chairman, President and CEO: Obviously, we’ll be cautious about giving forward-looking guidance, Matt. But, the one thing I would highlight is during this quarter last year is when we saw a significant acceleration in sales, and they began to accelerate as the calendar year started last year. As we entered this new calendar year, our sales comparisons were tougher and that was reflected somewhat in our sales performance. Over the long run - let me back up, the second quarter is also an incredibly tenuous quarter for us, every single year because you have several holidays in there and then the weather patterns can be very different from week-to-week. So it’s very hard to look at what your individual sales are on a week-to-week basis and be able to really understand the trajectory of your business. As we look-forward, when we came into this quarter and we were more cautious on the sales environment, and you can see that with our SG&G leverage. We are certainly going to be cautious as we go forward to make sure that we are well positioned regardless of the sales environment, but then we are going to work like crazy to continue to capture as much market share and grow our sales as rapidly as we can.

Matthew Fassler - Goldman Sachs: Got it. Second question. You spoke about the mix of discretionary and I guess failure and traditional maintenance goods being a bit different this quarter. What does that tell you in your view about the customer who shop in your store or about the health of the consumer as it relates to your category?

William C. Rhodes, III - Chairman, President and CEO: I would say a couple of things. First of all, the hub store initiative and our merchandising team has been intensely focused on improving our hard parts assortment over the last several years. And while these failure items that we are seeing increases in sales, those are coming from a lot of work that that team has done. Secondly, in this economic environment, we’ve been in it for quite a while now. I think people – they are going to – they have to fix failure-related item. They don’t have an option. They can defer some maintenance, they can clearly defer discretionary, but they don’t have the option of deferring failure. So my read on the customer at this point in time is it’s really not that different than it was over the last 12 months or so, and also I don’t see it changing rapidly anytime soon.

Matthew Fassler - Goldman Sachs: Got it. And then finally, you spoke about the (one team) effort or experiment. You said you (weren’t going) to say that much more about it. Any additional color you could add on training or payroll, if this is a cost-in, sales-out kind of effort or is it a cost-neutral kind of effort for you as you begin to test it?

William C. Rhodes, III - Chairman, President and CEO: Yes. I think as we tested it - first of all, we have different phases that we are testing in a very small number of stores. In those cases, it’s basically cost-neutral at this point in time. There is a possibility that we could reduce cost as a result of it. There is also a possibility we could increase cost as a result of an improved customer service and therefore sales. The biggest thing that I think is building at this point in time is it’s a very strong message to our entire organization that we are one team and that our title is also a customer satisfaction. They don’t say customer satisfaction retail or customer satisfaction commercial. And the whole mindset of the field and operation - sales and operations team is already changing to say 'You know what, I’ve got to help out on either part of the business regardless of where - which part I am assigned to.'

Operator: Colin McGranahn, Bernstein.

Colin McGranahn - Bernstein: Just on the hub store and the new operating model, I think if I recall you’re now more than a year into having converted some of those stores. I just wanted to see what kind of cadence of growth you get as you convert to the new operating model, where do you see that quarter? And then as some of these stores are now hitting kind of year two, what kind of lift do you continue to see?

William C. Rhodes, III - Chairman, President and CEO: We obviously see a significant lift when we first open the hub stores and that takes a little while for them to ramp up the speed and get the operations refined. But encouragingly the stores that are in their second – and we actually have five stores that are in their third-year, they all continue to show very healthy sales gains.

Colin McGranahn - Bernstein: Okay. Better than average, so there's still lifting above the control stores that are left that haven't been converted?

William C. Rhodes, III - Chairman, President and CEO: Yes.

Colin McGranahn - Bernstein: Okay. Then second, looks like nice reasonable market share gains in the business, certainly more on commercial. Can we have a sense from the NPD data where that market share is coming from?

William C. Rhodes, III - Chairman, President and CEO: Yes, Colin and I tried to touch on it in our prepared remarks. It's basically coming from virtually every geographic region of the country, in both DIY and DIFM. Sure, there are some differences here and there, but they're not terribly meaningful.

Colin McGranahn - Bernstein: I was more interested in the type of competitors. Is it coming more from the independents? Is it coming from some of your primary public competitors?

William C. Rhodes, III - Chairman, President and CEO: Okay, I'm sorry, I didn't understand your question. The NPD information is only the eight largest players, so the public retailers and some of the traditional guys. So we don't have visibility from that into the independents.

Colin McGranahn - Bernstein: Okay, that's helpful. And then finally just a follow-up on the one team, the blended store concept. In those stores, have you gone to a single labor scheduling model at some of those tests where you’re actually sharing associates back and forth between commercial and DIY?

William C. Rhodes, III - Chairman, President and CEO: That's the premise as far as some of the work that has to be done to operationalize this initiative. There's a lot of systems work, some of which is related to our labor scheduling and some of which is related to customer service systems like (ZNet).

Operator: John Lawrence, Morgan Keegan.

Ben Brownlow - Morgan Keegan: This is Ben for John. Could you just talk a little bit about how the quarter flowed? I know it's difficult to look at sales on a week-by-week basis. But I guess just kind of how maybe whether impacted the comps?

William C. Rhodes, III - Chairman, President and CEO: Again, Ben, I would go back to my previous comments that the second half was more challenging than the first half. And the biggest part of that I wouldn’t say was necessarily weather, but it was that we were starting to annualize a significant ramp that we saw last year. Clearly at the very end of the quarter with a heavy snowfall, we had some challenges but we need to be real careful in trying to read week-to-week sales. But at the end of the day, we were pleased with our sales performance. We increased our two-year and three-year comp store sales performance. We gained market share, so all-in-all we feel pretty good about the quarter.

Operator: Kate McShane, Citi Investment Research.

Kate McShane - Citi Investment Research: I was wondering if you could give a little bit more color, I think you’d mentioned in your prepared comments that this is one of the first quarters you saw pick up in spend for some of your discretionary items, even though failure products still performed very well during the quarter. Can you give any more color behind this comment?

William C. Rhodes, III - Chairman, President and CEO: Yes. I think what we said was we weren’t calling it out as a significant decline. There our sales performance in discretionary categories seemed to flatten out a little bit, so it wasn’t a material decline. It also wasn’t a big gainer. Now I think some of that work is our team is working on those discretionary categories. It’s really done some great work, and I think there what we are seeing on the rebound in that business is really a result of their work, not necessarily that consumer behaviors have changed, at least that’s my early read on it.

Kate McShane - Citi Investment Research: Okay, great. Then with some of the dealership closures and the conversions of those dealerships, has your commercial growth come as a result of this and can you see things accelerate with the continued conversions over the next 12 months?

William C. Rhodes, III - Chairman, President and CEO: Yeah. I think that’s a great question. But you’ve got to go back and remember, we only have 1.5% market share, so there are some dynamics that are changing in the macro environment in commercial, but I think our actions and activities determine our success in commercial so much more so than whether a few thousand dealerships close at this point in time.

Operator: Tony Cristello, BB&T Capital.

Anthony Cristello - BB&T Capital: I guess, Bill, when you look at the impact of parts proliferation and sort of what you’re doing with the hub build-out, can you maybe frame a little bit in terms of how these hubs are capturing the parts coverage? I mean is that at a certain level today and what that build-out bring you, does it give you enough parts coverage down the road from an evolving supply chain if (you think about the makes and) models that are going to be entering sort of your sweet spot over the next three to five years?

William C. Rhodes, III - Chairman, President and CEO: Yeah, it’s a great question, Tony, and one that we’ve been very focused on. I will tell you that these super hubs that we are rolling out now, we couldn’t be more pleased with how they are performing. Their performance is exceeding what we anticipated they will be doing, and they have brought a tremendous amount of coverage to the marketplace. Now as with, what we’re always doing, we’re always testing. So, we’re taking opportunities to test even further levels of inventory coverage in select of these stores to see where the right point is, and we’ll continue to test up and down versions. It’s also given us the opportunity to reduce some of the coverage in our satellite stores, which will help us from a working capital point of view, allow us to make sure we have the parts and products in the local market, (while also in going back at the hub store) going to be more efficient about it. But over the long – part proliferation is here. It’s been here ever since I got in this business. It continues to grow every year, and I think we’re pretty well positioned to take care of it.

Anthony Cristello - BB&T Capital: And when you think about sort of what’s going on at the dealership level and the lack of or the softness in new vehicle sales, that's a one less touch point that they have with their customer from a service standpoint as well. Is that also an opportunity as you see that business perhaps coming into the aftermarket? Does that mean that the starting point of when you're seeing these late model vehicles is continuing to inch forward? Is that what you're seeing as well?

William C. Rhodes, III - Chairman, President and CEO: I think it's a little early to make that call that we're seeing them earlier in their lifecycle, and again on the commercial side of the business, we're still relatively new in it, so we're continuing to learn a lot on that front. To me the bigger point is, I think, people have changed their mindset on how long they are going to hold on to their vehicle and, therefore, they're maintaining them at a higher level. And I think that's helping both our DIY and commercial businesses and the market itself.

Operator: William Truelove, UBS.

William Truelove - UBS: Yeah, I have a follow-up question about the commercial accounts. With so many different companies focusing on growing commercial business, has there been a competitive reaction that's changing in that marketplace going forward?

William C. Rhodes, III - Chairman, President and CEO: Not terribly. I think we have great competitors whether it’s the retail side of the business or the commercial side of the business. But I haven't seen significant changes in the competitive landscape. Obviously, there are lot of people that are very focused on it. The point that we're making to ourselves, we are very focused on it. We're also very focused on our DIY business.

William Truelove - UBS: Right, and then the second – follow-up on inventory, with the hub stores helping but also with the hard product initiatives that you're talking about, what would you anticipate from a gross inventory per store? Are we going to keep similar levels or could it increase or decrease going forward?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: I think you’d see similar levels, and with the slight increases I think we've done a terrific job of being able to optimize some of our inventory, particularly by leveraging the hub stores. But at the same time, as Bill mentioned, parts proliferation is an existing part and an important part of the business and our ability to say yes to the customer who requires us to increase our coverage. And I think the merchandising team has done a terrific job with that over the last couple of years, and I think we are seeing that today in some of the increased penetration that we’ve got on our failure-related part.

Operator: (Adam Findler), Deutsche Bank.

Adam Findler - Deutsche Bank: This is Adam in for Mike Baker. (A couple points) questions on gross margin, if I could. The comment on acquisition cost helping to drive gross margins, is that – maybe you could give some color on that related to product deflation that we’ve seen over the past several months, helping to drive lower product cost or better buying?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: Yes, it’s a combination of both. I mean yes there is definitely some product – some deflation from some of the commodity based prices, but on the longer-term basis, we continue to increase our penetration of direct imported product, so that has actually helped reduce some of the acquisition costs. So I’d say it’s a combination of both. It’s not just strictly the commodity based (indiscernible) process.

Adam Findler - Deutsche Bank: And then how that ties into the comments on the growth in operating profit dollars and percentage in the commercial business? I was wondering if you could give some color on how much of that was possibly starting to get some leverage on the sales force with a very strong 8.5% sales lift versus maybe some better gross margins just on better buying?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: Well, there are (several indistincts) and I think that we have opportunity to improve operating margin as you articulated both through improvements in gross margin and then as our both of our businesses continued to get traction from the initiatives both on the DIY side as well as on the commercial side and we continue to increase our sales productivity we’ll have opportunities from a leverage standpoint on SG&A.

Adam Findler - Deutsche Bank: But in the second quarter specifically was one a bigger driver than the other, gross margin or SG&A leverage?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: I would say that actually they were fairly consistent. I wouldn’t lean one type to the other.

Operator: Michael Lasser, Barclays Capital.

Michael Lasser - Barclays Capital: On the commercial side, do you expect that there will be a meaningful network effect where you reach an inflection point from having the rollout of the enhanced hub model completed or might it be the case where that’s not necessarily true because at least a portion of customers are up and down the street garages rather than multi-location customers?

William C. Rhodes, III - Chairman, President and CEO: Yeah. I certainly hope that there is an inflection point, but I don’t think that it will be driven by network being across the market very completely. Each – the vast majority of this business today is up and down the street customers. They are not looking at the market impact. They are looking at how you’re servicing me, and so I don’t think there’ll be a massive market share growth aspect.

Michael Lasser - Barclays Capital: Okay, and then on the improvement in discretionary sale, do you have a sense whether that’s coming from longstanding AutoZone customers or more so from newer customers that might have migrated into the market over the last couple of years?

William C. Rhodes, III - Chairman, President and CEO: Yeah. We really haven’t cut it that finely. We are just looking at the actions that we’re taking and are pleased to see that business begin to turn around and again congratulate those folks that are out there working with all kind of different vendors trying to find new products that are compelling to whichever customers they are.

Michael Lasser - Barclays Capital: And has it been driven largely by new products or legacy products that have been doing better?

William C. Rhodes, III - Chairman, President and CEO: Yes. For the most part in that business, there is a lot of new products that you’re constantly pulling in and out. But, you also have products that are in there all the time like floor mats and car covers, and we’re beginning to see some turn in basically the vast majority of those businesses.

Operator: (Ivan Holman), RBC Capital Markets.

Ivan Holman - RBC Capital Markets: I just wanted to focus quickly on the commercial side of the business. You mentioned that a portion of your self-acceleration on that side of the business increased due to up and down the street customers. Did you sign any new national accounts? Was there any growth on that side of the biz?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: I won’t say that there is growth on that side. There's no major customer that we necessarily signed over this past quarter, but the national account side of the business continues to actually grow nicely, and so we continue to make good penetration on the national accounts. But obviously the up and down the street side of the business is the majority of the business, and that's really where we fight it every day out on the street to win that business.

Ivan Holman - RBC Capital Markets: And there was no specific addition or any particular account or any prospects going forward?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: Well, there's always prospects going forward, but there was no addition of a specific account that would have a material impact on the results.

Ivan Holman - RBC Capital Markets: A second question if I may, some of your competitors have mentioned some changes in pricing over the last several quarters. Have you noted anything in particular that's happened over the past quarter?

William T. Giles - CFO and EVP, Finance, Information Technology and Store Development: I would say as we look over the last quarter we haven't really seen any material changes from a pricing perspective on either side of the business, quite frankly.

William C. Rhodes, III - Chairman, President and CEO: Okay, before we conclude the call, I’d just like to take a moment to reiterate that our business model remains very solid. Our customers continue to tell us we're improving on our efforts to meet or exceed their needs and our market share data confirms that. We have a solid plan for 2010, but I want to stress that this is a marathon and not a sprint. Our focus is on our critical success factors. As we continue to focus on the basics and never take our eye off of optimizing long-term shareholder value, we are highly confident AutoZone will continue to be incredibly successful. Thank you very much for participating in today's call.

Operator: This does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.