AutoZone Inc AZO
Q1 2012 Earnings Call Transcript
Transcript Call Date 12/06/2011

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 discuss AutoZone's First Quarter Financial Results. Bill Rhodes, the Company's Chairman, President and CEO will be making a short presentation on the highlights of the quarter. This conference call will end promptly at 10.00 am Central Time, 11.00 am 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 27, 2011, 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 2012 first quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, Store Development and IT; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the first quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release along with slides complementing our comments today is available on our website, Please click on Quarterly Earnings Conference Calls to see them.

We are very pleased to announce our financial results and update you on our progress regarding our operational activities for 2012. Regarding the numbers, our EPS for the first quarter increased about 24%, another strong financial quarter for us, as our domestic same store sales increased 4.6%. This marks the 12th consecutive quarter of EPS growth in excess of 20% and the 21th consecutive quarter of double-digit EPS growth.

Our sales and operating profit growth rates were in line with the last couple of quarters, continuing to be driven by our focus on maintaining our competitive position within the retail sales category, strong performance in our commercial sales category, and continuing to grow our Mexico ALLDATA and E-Commerce businesses.

We continue to be pleased with our performance in each of these sectors. Again, the credit for our success belongs to all AutoZoners across our great organization. Their continued focus on improving customer service is what's differentiating us on an ongoing basis. I know phrases like focusing on customer service can seem overused these days, but it's how we run our business, from our most senior leaders of the organization to each and every store we talk about, and develop strategies to improve our interactions with our customers. It's this ongoing focus that we believe is resulting in strong sales and profit results.

With our first quarter sales up 7.4% over last year, we were again successful at growing our businesses, both retail and commercial, and across our Mexico ALLDATA and E-Commerce businesses. Customers continued to shop with us this past quarter to find good values in order to effectively maintain, repair, and enhance their vehicles. Our retail business performed well again this quarter, despite very significant same-store sales growth last year. In fact, this was our highest retail same store sales comparison since the second quarter of fiscal 2003. Our domestic commercial sales growth exceeded 20% for the sixth straight quarter and we grew our other businesses, made up of ALLDATA and E-Commerce, by 9.6%. These increases, in general, were consistent with last quarter's results.

In an effort to address questions that may be on some listener's mind this morning, I thought I'd spend a moment discussing what we did see from the customer that was new or different and what were we doing to manage these effects.

First, in regards our retail customers. As it is the largest segment of our sales mix, it has been and remained at the top of our key priorities. With respect to our retail customers, simply put, we didn't see a large change in the shopping or buying behaviors. Our sales mix changed only slightly from last quarter and in line with seasonal selling patterns. Failure related items, as we define them, continue to be our largest selling category, representing approximately 45% of our mix. Customers this past quarter continued to fix their cars as this category represents merchandise that is the most consistent in terms of demand from customers.

Much like the recent past, we saw our discretionary merchandise category be a smaller percentage of our business, in the mid-teens. Customers continue to manage their expenditures very closely, and we're seeing them remain cautious in this area.

Finally, regarding our maintenance category, they like last quarter, represented approximately 40% of the mix. Regarding our good, better, best selection of goods, we did not see a material change in the selling mix. While we don't disclose overall mixes in these categories, we've done a good job of educating our customers on the value proposition of our better and best grades of merchandise, and in fact, we've been successful at migrating sales up in several categories.

Heading into the remainder of our fiscal year, we're continuing to focus our marketing messages on maintenance related categories as we believe the economy and our customers' ability to spend will remain challenged for the near-term. So, overall, the buying behaviors for our consumer remained somewhat consistent during the quarter.

Now, let me review our operating theme for 2012, one theme driving our future. The key priorities for the year are; 'Great People Providing Great Service', profitably growing our commercial business, leveraging the Internet and hub store improvements.

On the retail front this past quarter, under the 'Great People Providing Great Service' theme, we've spend a tremendous amount of energy on execution. We've made our primary messages to the field organization focused on culture and driving the theme of putting customers first. This may increase training for managers and our part sales specialists.

We've been driving home the theme of exceeding our customers' expectations when they come into our stores. We are also communicating more and more frequently with our stores through Internet tools to establish further store level key performance indicators. This is all with a goal of driving consistent store level service and execution. We continue to believe the more we understand about our customers' shopping and buying patterns, the better we will be able to service their needs and help them buy what they want.

Through utilizing our hub network more, we continue to drive more inventory, especially late model coverage, closer to our end-consumers. We are encouraged by the progress we have made here as we are able to say yes to our customers in terms of parts availability more frequently, much more frequently than we were just a few years ago.

On the commercial front, we continued executing our game plan, opening 74 new programs and growing our business with existing customers. We now have Commercial in 2,733 stores or 60% of our domestic store base. We will discuss in more detail our operating performance later in the call, however, I will say, we continue to see opportunities for sales growth from both existing programs and through opening new ones.

Regarding our first quarter sales results, our total auto parts segment made up of both our domestic and Mexico businesses delivered a 7.4% increase. Our other businesses, made up of all ALLDATA and E-Commerce were up 9.6%.

During the quarter we continued to open new stores both in the United States and Mexico, 17 net new stores in the U.S. and two in Mexico and expect to grow our square footage for the year at a combined annual growth rate of approximately 4%.

We also continued our hub store expansion and relocation efforts this past quarter. With a total of 145 hubs we expanded our hub count this past quarter. We also expanded four locations adding a material amount of square footage while relocating two locations.

To truly begin our efforts on redefining our hub network and square footage needs, we have modified 30 hubs. As we continue to see traction from utilizing and expanding the reach of our hub network by expanding sales from new hub store SKU additions, plus related part sales, we see the potential to modify in some ways more than 50 locations over the next couple of years.

While we have spent a lot of time highlighting our hub strategy, the strategy is hopefully a simple one to understand. As customers are demanding more SKU availability on a just in time basis, we see our hub strategy as a way to deploy inventory into a market without adding additional inventory to every store. It allows us the opportunity to aggregate demand of many stores which efforts us the opportunity to be more aggressive with inventory additions at the hubs.

As we've made considerable investments in our commercial business, our hub stores help us meet our professional customers' needs better today, and these inventory additions help our retail business as well. Finally, we continued, in general, to refine our merchandise placement efforts, adding more late-model products while continually reducing less productive inventory.

I'll take a moment now to talk more specifically about our first quarter performance in a little more detail. As I mentioned, our domestic same-store sales grew 4.6% for the quarter. Our first quarter, which ended November 9, did not experience much variability in sales results from week-to-week or period-to-period. Like our last quarter, approximately 1.5 percentage points separated our three periods of same-store sales performance over the quarter.

While last year, we estimated weather contributed up to 20% of our 9.5% comp, this year we estimated weather had a neutral to slightly negative effect on sales, therefore slightly hurting our comp store results. We estimate the single biggest headwind to sales performance during the quarter came from higher gas prices relative to last year's first quarter, as gas prices remain higher by approximately 25% year-over-year.

Our increased emphasis on the commercial business again resulted in quite impressive results. Our first quarter commercial sales growth of 22.6% represents our sixth straight quarter of 20% plus sales growth. While we weren't able to keep our accelerating growth trend going, as last quarter we grew at a record 23.4%, we're still quite happy with our results.

While we are pleased with our commercial rate of growth, we recognize that we currently have a small market share, and this remains a tremendous opportunity for us, both in terms of growing the number of programs that we currently have as well as improving the productivity of our existing programs. Therefore, we have and expect to continue to invest in order to grow sales and further capture profitable market share.

As we accelerate our investments to grow Commercial and as Commercial becomes a larger portion of overall business, our gross margin and operating expense rates will be pressured, as Commercial is a lower margin business. However, as we've stated in the past, as we grow Commercial, we're focused on growing operating profit dollars at strong levels of return on the capital we deploy. I should state, however, while Commercial is dilutive to our overall margins, the Commercial business operating margin continues to increase despite these heavy investments and the expectation is that over time it will only continue to do so.

I'd also like to recognize our other businesses, ALLDATA and E-Commerce, for having another fine quarter of 9.6% in sales from this time last year. This section of our business, while small as a percentage of our overall sales mix, continues to experience faster growth than the auto part stores, and that's quite an accomplishment considering we've remained very pleased with our stores performance. This quarter regarding our Commercial – our Retail customer count and average ticket growth rate, average ticket remained strong, better than previous quarters. However, transactions were down versus last year's first quarter.

The story here was similar to last quarter, where the deceleration of transaction count in the DIY business could be attributed to several factors. However, the slow down in maintenance related categories remained a strong contributor. Transactions with maintenance items attached are traditionally smaller ticket transactions. With maintenance related categories showing slower growth, the direct result has been a slowdown in overall transactions.

We understand maintenance related sales can be challenging for our DIY customers in this difficult economic environment. That is why much of our messaging is aimed at the importance of properly maintaining your vehicle. Additionally, as previously mentioned, our Q1 retail sales performance was exceptionally strong last year. So, annualizing those traffic gains was a difficult to comparison.

Regarding our execution, we continue to believe that superior execution can be a sustainable point of differentiation. In an industry where changes to vehicle technology brands and systems are constant, we've been keenly focused on evaluating the most efficient way that we can fulfill our customers' needs. We've been pleased with the enhancements we have made to our hubs over the past year along with the improved inventory coverage.

In addition, with the average age of cars on the road increased in the last few years, we're seeing that distribution by age of parts sold widening at both ends. While a seven-year old and older vehicle is our kind of vehicle on the Retail front, it is noticeable that customers with considerably older than seven-year old vehicles remain key customers for us. The demands from our Commercial customers continue to offer us opportunity to drive parts additions earlier in the vehicle lifecycle, which benefits both the DIFM and DIY.

Additionally, we've been very focused on leveraging the Internet across a variety of fronts. We've been pleased with our progress on developing our Internet offerings, but we are in the very early innings of tapping into these growing customer segments that utilize this venue for ordering their parts and products.

I want to reiterate, while our financial performance has been solid, we take nothing for granted. Our commitment to our ongoing planning efforts allows us good visibility into business trends, and our team is committed to managing to those trends appropriately.

We've been very deliberate in how we manage expenses and capital in order to deliver consistent strong financial performance while positioning our business for long-term growth and we will continue with this strategy well into the future.

We should also highlight another strong performance in return on invested capital as we were able to grow this metric to 32.1% on a trailing four-quarter basis, which represents another new all-time high for our organization.

One of the big drivers to this growth has been the EBIT growth of the Commercial business. While having a lower EBIT margin as a percent of sales which creates some margin rate pressure, but capital requirements of the Commercial model are minimal. The investments are mainly operating expense related, AutoZoners who develop relationships and sale to our customers and other AutoZoners who execute the orders and deliver products to these important customers.

The ability to leverage our existing assets, primarily AutoZoners, store locations, inventory and information systems across this additional customer base provides us with a terrific opportunity to grow operating profit dollars and drive incremental returns on capital. It should be reiterated, we will always maintain our diligence regarding capital stewardship as the capital we spend is our investors' capital.

Now, I will turn it over to Bill Giles, to talk about our financial results for the quarter. Bill?

William T. Giles - CFO and EVP, Finance, IT and Store Development: Thanks Will. Good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our Retail, Commercial and Mexico results for the quarter. For the quarter, total auto parts sales increased 7.4% on top of last year's first quarter's growth of 12.8%. This segmentation includes our domestic Retail and Commercial businesses, and our Mexico stores.

This quarter we again completed merchandise line reviews with the goal of completing at least one review each year on every category.

Regarding macro trends, during the first quarter unleaded gas prices started out at $3.67 a gallon and declined steadily, finishing the quarter at $3.37 a gallon. Last year, gas prices increased $0.20 per gallon during the first quarter albeit from a substantially lower beginning point starting at $2.68 and ending at $2.88 a gallon. We are hoping this decline in trend continues as a reduction in prices at the pump can materially help our customers' pocket books. At the same time, with gas prices remaining high, there is an opportunity for us to communicate with our customers on steps they can take to improve their gas mileage.

Miles driven remains less of a story to our near-term sales results than previous years. Through September, seven of the last nine months have run negative to the previous year's miles driven. Year-to-date through September, miles driven are now down 1.3%. Unless trends change, this year will mark the first declining year since 2008.

While recently we have seen minimal correlation to our sales performance with miles driven, historically, it has been one of the key statistics which correlate to our sales results over the long term. The other is the number of seven-year-old and older vehicles on the road, which continues to trend in our industry's favor. We also recognize that miles driven on cars over 10 years old, the current average is much different than on newer cars in terms of wear and tear.

For the trailing four quarters, total auto part sales per square foot were $261. This statistic continues to set the pace for the rest of the industry. This metric is up 3.7% over the last year's first quarter and over 8% since the first quarter of 2010's $241 a square foot. In fact, this is the highest level we have achieved since fiscal 2003. This is impressive improvement, is a key contributor to our record EBIT margin percent and our record ROIC.

For the quarter, total commercial sales increased 22.6% and the first quarter commercial represented 14.2% of our total sales, and grew $50 million over last year's Q1. Last year's commercial sales mix percent was 12.4%. As we have said previously, we have been very pleased with the progress we are making in this business, both operationally and financially. We believe there are ample opportunities for us to continue to improve the many facets of our operations and offerings, and therefore, we are quite optimistic about the future of this business.

Our sales growth has come from both existing and new customers. We continue to believe we can grow revenues in existing stores and we will continue to open additional commercial programs. This past quarter, we opened 74 new programs versus 54 programs in last year's first quarter. We now have our commercial program in 2,733 stores supported by 145 hub stores.

With only 60% of our domestic stores having the commercial program and our average revenue per program materially below several of our competitors, we believe there is ample opportunity for additional program growth, aside from improved productivity opportunities in current programs.

Our focus this past quarter was to build upon the commercial initiatives that have been in place for well over a year. We continue to watch our sales force mature from its inception just three plus years ago. We are also enhancing training and introducing additional technology to optimize the productivity of our sales force.

We've increased our efforts around analyzing customer purchasing trends and in-stock trends. We've had 18 consecutive quarters of sales growth. We have a model that is successful and scalable and we are continuing to test additional enhancements to our offerings.

In addition to our focus on further developing our sales force, we have continued to add significant resources to our Commercial business from additional late-model import and domestic coverage, both in satellite and hub stores, to additional labor hours and trucks.

In summary, we remain committed to building a platform for long-term growth at a deliberate pace, growth in both sales and profits. Our Commercial business remains on track and we're excited about our continuing opportunities.

Our Mexico stores continue to perform well. We opened two new stores during the first quarter and currently have 281 stores in Mexico. We remain resolute on our strategy to open stores at a steady pace while managing our Mexico business for the long run. We've operated stores in Mexico for over 12 years and we continue to see great opportunity for growth going forward. Our returns and profit growth have been in line with our expectations.

Regarding the announcement of future store growth in Brazil there is not much to report today as you'd probably expect. We're targeting to open our first store there late in calendar 2012, and beyond that there is nothing new to mention.

Recapping our first quarter performance for the Company; in total, our sales for the first quarter were $1.924 billion, an increase of 7.4% from last year's first quarter. Domestic same-store sales or sale for stores open more than one year were up 4.6% for the quarter.

Gross margin for the quarter was 51.1% of sales, up 45 basis points compared to last year's first quarter. The improvement in gross margin was attributable to lower distribution cost on higher sales, lower shrink expense and slightly higher merchandize margins.

Our field and loss prevention teams have undertaken several initiatives over the past few years that have led to improving our shrink results. While we have benefited the last four quarters from lower shrink expense, we recognize savings only after we have physically counted our stores and distribution centers, and there could be no guarantee that this trend will continue, although we continue to be pleased with our current results.

In regards to inflation, we have seen rising costs in commodity-related products. Although certain categories have experienced some higher levels of inflation, taken as a whole, inflation hasn't been a material component of our overall gross margin improvements. We remain cognizant of future developments regarding inflation, and we'll make the appropriate adjustments should they arise.

Looking forward, we continue to believe there remains opportunity for gross margin expansion. However, we do not manage to a targeted gross profit margin percentage. We are focused on growing absolute gross profit dollars and gross profit dollars and gross profit dollars in our total auto parts segments were up 7.4% for the quarter.

SG&A for the quarter was 33.4% of sales, improving 18 basis points from last year's first quarter. The decline in operating expenses as a percentage of sales was due to lower incentive compensation, favorable legal expense and leverage from sales volumes. Partially offsetting this leverage were higher current year self-insurance costs.

While our operating expense percentage growth increased faster than square footage growth, we have purposefully invested these dollars to position the Company for future sales and profit growth. This organization takes great pride in our disciplined approach to managing our cost structure and leveraging our culture of thrift, and we remain committed to appropriately managing expenses in line with our overall performance. We continue to believe we are well positioned to manage our cost structure for the foreseeable future.

Earnings before interest and taxes for the quarter were $341 million, up 11.4% over last year's first quarter. Our EBIT margin improved to 17.7% or 63 basis points versus the previous year's first quarter. Interest expense for the quarter was $39.1 million compared with $37.3 million in Q1 a year ago, a 4.9% increase.

Debt outstanding at the end of the quarter was $3.354 billion or approximately $475 million more than last year's first quarter balance of $2.879 billion, but consistent with our most recent quarter ended August 27.

Our adjusted debt level metric finished the quarter at 2.4 times EBITDA. While in any given quarter we may increase or decrease debt levels based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy, and share repurchases are an important element of that strategy.

For the quarter, our tax rate was approximately 36.7%, up from last year's first quarter at 36%. We expect it to close at 37% on an ongoing basis. Net income for the quarter of $191 million was up 11.1% versus the prior year's first quarter. Our diluted share count of 40.9 million was down approximately 10% from last year's first quarter. The combination of these factors drove earnings per share for the quarter to $4.68, up 24% over the prior year's first quarter.

Related to the cash flow statement for the first fiscal quarter of 2011, we generated $342 million of operating cash flow versus last year's Q1 of $357 million. Net fixed assets were up 5% versus last year. Capital expenditures for the quarter totaled $62 million and reflected the additional expenditures required to open 19 new stores this quarter, capital expenditures on existing stores, and work on the development of new stores for upcoming quarters.

With the new stores opened, we finished this past quarter with 4,551 stores in 48 states in the District of Colombia and Puerto Rico, and 281 stores in Mexico, for a total store count of 4,832. Depreciation totaled $48.6 million for the quarter versus last year's first quarter expense of $44.3 million.

With the excess cash flow, we purchased $310 million of AutoZone stock in the first quarter, and at the end of the quarter, we had $659 million remaining under our share buyback authorization. We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as, a percent of gross inventory, finished the quarter at 112% versus 107% in last year's first quarter.

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 $2.5 billion, up 7% versus the Q1 ending balance last year. Increased inventory reflects new store growth along with additional investments and coverage for select categories. Inventory per store was up 3% and in line with our 4.6% same store sales growth.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 32.1%. 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.

William C. Rhodes, III - Chairman, President and CEO: Thank you, Bill. Before we conclude, I want to reiterate that our industry's performance has been strong over the last three years, but I believe our team's commitment to our culture and our customers, combined with our initiatives have contributed significantly to our success, as evidenced by our sales and share growth in both retail and commercial. We remain committed to continuing to improve our business model and our operations' continual steady refinements. We believe our business model is helping and we have material opportunities for further improvements from this point.

In fiscal 2012, we will continue to focus on our key priorities, great people providing great services, profitably growing the commercial business, leveraging the Internet, and our hub strategy, but we're really focused on relocations and expansions at this point.

After the last three very impressive years of performance, our first quarter has again started out strong. As we entered the quarter, we had some concerns, because we were comparing against our strongest quarter since quarter two of fiscal 2003, but with our AutoZoners' continued intense focus on providing great service and trustworthy advice, we were able to deliver these impressive results.

I want to again thank and congratulate our entire organization for their dedication to our customers, fellow AutoZoners, stockholders and the communities we serve. Our approach remains consistent. We're focused on succeeding in the second quarter of 2012, and we are quite optimistic and excited about the remainder of the year.

Now, we'd like to open up the call for questions.

Transcript Call Date 12/06/2011

Operator: John Lawrence, Morgan Keegan.

John Lawrence - Morgan Keegan: Bill, would you comment just a little bit on the Commercial business and dig a little deeper there? When you talk about not only can you see the growth from new stores, but the existing, would you just walk us through a little bit? You had to get the parts coverage over time, there were some processes in the sales force, where do you think you need to go now? What would be the next steps to improve those early Commercial accounts to make that more productive?

William C. Rhodes, III - Chairman, President and CEO: Sure. I think a big part of it, John, is we have made significant improvements in our core execution in the Commercial business. I think we've got to make sure we continue to get out there and tell our story. Our territory sales managers are out there today telling our story and they're building deeper and deeper relationships with our customers, but building those relationships takes time. At the end of the day, we have been very pleased with the old programs that have been out there and their growth, we have been very pleased with the programs we have opened over the last couple of years and their growth; we are also pleased with the programs that we are opening now. So, across the board, we continue to be pretty bullish on it and you can see that based on the fact that we are opening more and more programs over time.

John Lawrence - Morgan Keegan: Second question just on line reviews. When you look at your comments on widening the ages of those parts, does that mean a – I know you have always been very disciplined on those line reviews, but does it change any process as those ages get wider?

William C. Rhodes, III - Chairman, President and CEO: No, I don’t think it changes the processes. Our team has really developed a very sophisticated inventory selection model on a per store basis for hard parts, but as we continue to see the age of vehicles, that bell curve widen, it's just giving us more and more opportunities to put more products in the stores and we have challenges with that, obviously, the financial challenges of additional inventory, but also space challenges. So, that’s where this hub strategy is really so critical to our current success and really even more critical to the future success.

John Lawrence - Morgan Keegan: Last question, can you comment on the size of Duralast at this point?

William T. Giles - CFO and EVP, Finance, IT and Store Development: Basically, we always say that our Duralast program continues to be strong. We don’t actually quantify exactly what their overall percentage of penetration is. As you will recall, we have talked about it over the last four quarters as we have increased our Duralast penetration that’s been a bit of a benefit for our gross margin, and we continue to find opportunities in certain categories for us to continue to expand that, so we are very bullish on Duralast and its opportunities for continued expansion.

Operator: Ivan Holman, Citigroup.

Ivan Holman - Citigroup: This is Ivan in for Kate. Congratulations on a very solid quarter. First question, maybe this is for Bill, focusing on store economics, on a per store basis, your commercial sales are still running below competitors. Can you provide some type of timeline of when you think you can bridge that delta, and whether or not growing the Commercial programs will cannibalize the DIY side of the house?

William T. Giles - CFO and EVP, Finance, IT and Store Development: I'll go backwards. We certainly don't believe that growing the Commercial programs will cannibalize the DIY side of the house. In fact, one of the things that we have found is that we continue to expand our assortment in our coverage, continue to expand inventory coverage in our hub stores with a focus on improving our commercial business, and have actually found as a byproduct that that has actually helped our DIY business, so actually just the opposite. We find the businesses to be relatively complementary, ability for us to add more inventory into the marketplace, and frankly, more labor into the stores, servicing both of those important customers. From a productivity perspective, as you've seen, we've had great growth from our Commercial programs being up over 20% overall growth, and that's coming from both new programs that we've added, we've added almost 10% program growth in the last fiscal year, and continue to feel very confident about our ability to continue to expand more programs, but we're getting good growth out of the existing stores. I think Bill highlighted a couple of other important points, that when you think about the building blocks that we put in place between the sales force, territory sales managers, the inventory coverage, some of the technology enhancements that we've made to the programs, we think that we've got a very good foundation to continue to improve the productivity of our existing stores. So, we recognize there's a gap, but we're really excited about our ability to continue to close that gap and improve the productivity.

Ivan Holman - Citigroup: Just a quick follow-up. The comp accelerated materially on a two-year stack. Do you believe the current pace of improvement is sustainable? As we think of the cadence of sales for the year ahead, 2Q is typically the smallest quarter of the year; do you anticipate more seasonality given the backdrop of a still constrained consumer?

William T. Giles - CFO and EVP, Finance, IT and Store Development: Yes, we definitely believe that there's seasonality in Q2 and one of the things we've always been very consistent about indicating is that Q2 always is one of the more choppier quarters. We've got a fair amount of holiday time during there and it's certainly the lowest volume quarter. So, we just take it one quarter at a time and we feel encouraged about our initiatives, but we recognize that the consumer continues to be under a lot of economic pressure.

Operator: Sam Reid, Barclays Capital. (Unverified)

Sam Reid - Barclays Capital: One of your competitors discussed regional variations on the DIY side. I was wondering, if you all had any comments on that, maybe if you are seeing any variations yourself?

William C. Rhodes, III - Chairman, President and CEO: Yes, obviously, when you are a national operator like us, we have certain areas over time that are areas of strength and other areas that are more challenged. I think you're referring to some folks calling out that the southeast has been little bit more difficult and that's accurate, we're seeing the same, but it's still a very healthy market. One of the things when you think about why it could be more difficult, it's the most competitive area in the country and it's also where tremendous amount of new store openings are focused. So, we don't think it's anything that drastic. We continue to be pleased with our performance there and hope to improve it over time. Our big thing is, as a national operator, weather effects and economic indicators are going to go region to region over time. We believe our game plan is a right game plan and we just need to execute.

Operator: Dan Wewer, Raymond James.

Unidentified Analyst: It's (indiscernible) in for Dan. Congrats on another good quarter.

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

Unidentified Analyst: Two quick questions; first, can you give us a breakdown of your mix on failure/maintenance in the discretionary merchandise?

William C. Rhodes, III - Chairman, President and CEO: We've talked about it a little bit in the prepared comment. Failure was roughly 45%.

Unidentified Analyst: What was that relative to last on failure?

William C. Rhodes, III - Chairman, President and CEO: Not significantly different. We really didn't see much change during this quarter between those three categories.

Unidentified Analyst: Then maintenance versus discretionary?

William C. Rhodes, III - Chairman, President and CEO: Maintenance is about 40%.

Unidentified Analyst: Sort of like a long-term question that we've been curious about. If you look at vehicle demographics, (indiscernible) running about I think 13 million to 13.5 million a year, a little below scrappage. It's been like that on and off for last couple of years. It's good for the aged cars right now, but you're actually seeing fewer cars on the road. Is there any worry that new car sales being so slow will impact future sales? I mean is that a long-term negative? What do you guys doing or how you guys are thinking about that?

William C. Rhodes, III - Chairman, President and CEO: I think the first thing you think about is, when you get 250 million vehicles on the road, the difference in one year sales of 13 million or 14 million isn't going to make a big difference. We have not seen declining overall vehicle population at this rate. We do have some concerns of miles driven being down. This will now be likely the second year over the course of the last few years where miles driven have been down. Fewer miles over the long-term is going to be less maintenance and less failure, it's less wear and tear on the vehicle. So that has us mildly concerned. Let me characterize it that way.

Operator: Scot Ciccarelli, RBC Capital.

Patrick Palfrey - RBC Capital: This is (Patrick Palfrey) sitting in for Scott today. I just had a couple of questions on margins, if I may. You called out higher self-insurance cost as a contributor to higher expense in the past couple of quarters. I was just curious as what is driving the higher self-insurance expense?

William T. Giles - CFO and EVP, Finance, IT and Store Development: On that one we're seeing a bit of an increase in health and medical, and so we've seen some increase just over this most recent quarter on health and medical. So we continue to evaluate it and take steps to be able to curtail that to the extent that we can, but there's been some pressure on that and then may be a little bit of pressure on casualty, but not a significant.

Patrick Palfrey - RBC Capital: Within gross margins, you also called out lower distribution expense on higher sales. Is the improvement directly attributable to the sales leverage or were you able to be more efficient in terms of the delivery of your product?

William T. Giles - CFO and EVP, Finance, IT and Store Development: I think it's a combination of both. I think our supply chain distribution people have really done a very good job of being able to operate a very efficient organization and we always find some opportunities to be even a little bit more efficient, but it's a combination of some of the efficiencies that they've put in place as well as well as just leveraging off of the sales volume.

Operator: (Mike Monotony), ISI Group.

Mike Monotony - ISI Group: This is Mike on for Greg Melich. I just had a question, first on SG&A dollar growth, up about 6.8% this quarter, last year obviously up close to 10%. If you think about moving forward, trying to do more work on Commercial, how should we think about that? Is, assuming comps are similar to where they are today, 6% sustainable or does that perhaps increase a bit as we look to gain market share in Commercial?

William T. Giles - CFO and EVP, Finance, IT and Store Development: I think there's going to be some continued investments in Commercial as we continue to roll out new programs. If you recall, over probably the last four quarters, we've made investments in Commercial. We've also made some investments in our hub programs as well. So, we think that the rate of growth will probably moderate relative to last year a little bit, but we're going to continue to invest back into the business to position ourselves for growth into the future.

Mike Monotony - ISI Group: Then, just to follow up on that CapEx side, is $320 million still roughly the right run rate or is there any material changes to that, again, given the acceleration we're seeing in Commercial?

William T. Giles - CFO and EVP, Finance, IT and Store Development: It probably would be a little bit higher than that, not so much on the Commercial but also on expansion of hubs, et cetera. So, I think it will be a little bit greater than that. But again, we're doing – most of our capital is devoted to new stores, and then obviously, maintenance on existing stores, and then there's some balance put aside for hub expansion as well.

Mike Monotony - ISI Group: Is maintenance still about a third of that, or how should we break that out?

William T. Giles - CFO and EVP, Finance, IT and Store Development: It's not a bad way to think about it. It's probably about that.

Operator: Chris Horvers, JPMorgan.

Mark Becks - JPMorgan: It's actually Mark Becks on for Chris. First question I have, the acceleration comps from looking at both sides of the business, can you speak to where this is coming from? I know you highlighted in your prepared remarks that you're seeing customers trade up to higher price points.

William C. Rhodes, III - Chairman, President and CEO: Over time, we continue – really, what we're seeing there is a lot of people anticipated that in this economic cycle, we would see people trading down, and really, what we're seeing is, we're not seeing them trade down. When you talk about the overall increase in average ticket, there are several things that are driving it. Number one, our teams are doing a great job in the field of sharing the value propositions with the customers and in many cases selling them up to the better or best products. Another thing that's going on underlying that is, there has been some pretty significant increases in commodity prices over the last 12 months and that's reflective in the retail prices of those products. The third thing and we talked about it a little bit on the last quarter is, there's a technological enhancement that's happening in this industry as parts and products are becoming more sophisticated, more complex. There's an underlying trend in the increase of those products, they also last a little bit longer, which puts some pressure on traffic counts that we are seeing over the last – more than last decade.

Mark Becks - JPMorgan: Then Commercial, just trying to get a better grasp of opportunity there. Can you speak to what volumes you're seeing in some of your mature programs versus what you are seeing in the newer immature programs there?

William C. Rhodes, III - Chairman, President and CEO: I think we see some stores with some very significant volumes. I really don't want to put out numbers from a competitive point of view. We have a significant amount of stores that are performing exceptionally well and we're very pleased with those. I think the thing that we're more excited about is the newer programs that we're developing are continuing to ramp up faster than they have on historical basis and as that continues to happen it gives us more confidence and makes us more aggressive about opening more programs sooner rather than later.

Mark Becks - JPMorgan: Then last question here, on the hubs. Originally, I think you spoke to relocating or expanding four. It looks like this number is creeping up little bit. I guess is this indicative of results being stronger than you anticipated or what may have changed?

William T. Giles - CFO and EVP, Finance, IT and Store Development: I would say combination of both. I think we're very encouraged with the performance that we've got out of the expansions that we've done up to this point. We've got about 145 hubs and we've always felt as though probably two-thirds of those required some level of expansion and we recognize that it would take a few years to be able to accomplish that. So, we would continue to expect to expand more hubs in the future.

Operator: Tony Cristello, BB&T Capital Markets.

Anthony Cristello - BB&T Capital Markets: I guess the first question I have is when you look at the Commercial rollout of the programs from a geographic standpoint, I believe you started that more focused on the hubs on the West Coast, if I'm not mistaken. If you look at now the 60% program coverage that you have in Commercial, on a geographic basis, would you feel that it's now evenly dispersed or are you more concentrated in one region than the other and so the next wave or so of relocations and/or openings would be concentrated to one particular market?

William C. Rhodes, III - Chairman, President and CEO: Yeah. I would say on the hubs that it is not geographically based at this point in time. Yes, we did have a slight slant when we started that program, the acceleration of the Super Hub program. We had some focus on the West Coast first, but at this point in time, I think it's more based upon the individual store locations that we have and do we have the right real estate there. On the Commercial programs, I think it does vary, frankly fairly significantly from region to region, but there are a lot of individual factors that are going to drive that and it's not really geographic. Where do we have the right footprint, where are we closest to the significant Commercial business, and frankly, where do we have the leaders that were the more aggressive in those areas as well.

Anthony Cristello - BB&T Capital Markets: So, do you think that what you've accomplished today and the strategy you've been using, have you gone after this easier opportunity and going from the 60% to 65% or 70% will be that much harder or what you learned throughout the process made your ability to go in and target a bit more easier and more efficient in how you roll them out?

William C. Rhodes, III - Chairman, President and CEO: It's a great question. I think it's a little bit of both. Clearly, we have opened the programs where they had the highest potential to do business, but the thing that's been interesting is and I hit on it just a minute ago, although we are opening in the lower potential areas, they all still have significant potential. As we're opening in these lower areas, we're actually outperforming in ramping up faster than we did over the last couple of years. I think that's due in part, because our program continues to be refined. We continue to gain share in the marketplace, gain share of voice, our sales team continues to improve. So, we believe, yes, it will be comparatively more difficult to go from 60% to 65% to 70%, but we have a lot of confidence that we are going to be able to continue to make those increases.

Anthony Cristello - BB&T Capital Markets: Maybe just one last question. When you look at your answer to one of the prior questions that was asked pertaining to the southeast, you noted there have been more store openings in that region that had potentially impacted sales. I guess from a bigger picture, at some point does the store opening growth from you and some of your larger peers at some point become counterproductive? Are there any areas outside of the south? I know one of – take out of context, what you said, so maybe I let you answer that first, but you can see where I'm trying to ask the question.

William C. Rhodes, III - Chairman, President and CEO: I think there's a lot of areas where all the major players are there, and frankly, look at everybody's results, and everybody thinks they're pretty well. So, I think this business, we don't have any areas where we are challenged significantly. Do we take a hit when somebody comes in? Absolutely. Then, we try to work ourselves out of it, but we're not running 32% return on invested capital if we're struggling in a bunch of markets.

Anthony Cristello - BB&T Capital Markets: What I wanted to more get at is does there ever become a situation where there's too much or there's a market saturation in a particular region? Are you so far away from that with fragmentation that it's not even an issue at this point?

William C. Rhodes, III - Chairman, President and CEO: I'd just say that I haven't seen a market yet that was so saturated that we were challenged economically.

Operator: Matthew Fassler, Goldman Sachs.

Ryan Brinkman - Goldman Sachs: It's actually Ryan Brinkman for Matt Fassler. Congratulations on the quarter. You discussed this to some extent already, but can you elaborate further upon the expected ramp in the number of commercial programs, which obviously remains very rapid? How should we think about the cadence going forward, and is the F 1Q rate sustainable?

William C. Rhodes, III - Chairman, President and CEO: I think here's the way we're looking at it. We have more and more aggressive plans that we're laying out. We certainly laid out more aggressive plans for the balance of this year than we had when we started this year, but we're going to pace them based upon how we continue to perform. We have gates along the way. You've heard us talk about it before, a pay-as-you-go mentality, where we're going to open a cluster of stores and as long as they're tracking on path, then we'll go ahead and open the next ones. If for some reason, whatever the reason is, we get off of that projected path, then we're going to slow down, we're going to go back and put intense focus on the stores that aren't performing to our expectations, leverage our focus there, and then once we get them going again, we'll come back in with the next batch. So, we won't lay out here's what the number is because that's not the way we're going to run it. We opened 235 net new stores last year. I certainly hope we do more than that this year, but we'll have to see. We're going to make sure that we perform to our expectations.

Ryan Brinkman - Goldman Sachs: Then, I'm curious as to the increase in self-insurance cost. Do you regard that as largely a one-time item, say the drain up of a reserve based fund estimates or might you need to recognize higher cost on a go forward basis?

William T. Giles - CFO and EVP, Finance, IT and Store Development: Well, we would expect that there's a little bit of a trend line there on some of them, but we can't really know that for sure. So, it certainly was a little bit of pressure for Q1 and we would anticipate it to be a little bit of pressure going forward, but probably not to that extent.

Ryan Brinkman - Goldman Sachs: Then, just last question. Is there anything that you are able to surmise thus far about sales trends in the current quarter?

William T. Giles - CFO and EVP, Finance, IT and Store Development: It's so early it's very difficult to add any color on it. I mean, we're just a week or two into the quarter. The other important point to mention is that it is our lowest volume quarter, so it has a lot of seasonality to it. So, we'll see how the quarter shapes out.

William C. Rhodes, III - Chairman, President and CEO: Like everybody else, the holiday sales aren't very important to us.

Operator: Craig Kennison, Robert W. Baird.

Craig Kennison - Robert W. Baird: I wanted to follow-up on the hub conversation that's been had so far. Is there a point at which your commercial business outgrows that hub infrastructure and might require more of a warehouse infrastructure like some of your peers?

William C. Rhodes, III - Chairman, President and CEO: I think the answer is, over the long-term, we don't believe that at all, but it actually has outgrown our infrastructure today, and that's how we're going through this expansion and relocation strategy. We originally put these hubs in based upon where we had excess space. So, some of them might be 10,000 or 12,000 feet and we crammed things in there, then it become such a strong and robust resource for us that we're having to move or relocate or expand about 75% of them over a long period of time. We do think that the hub strategy versus the warehouse strategy is the right strategy for us. We don't see any change in our long-term view on how we're going to distribute products. Our supply chain team does a great job and we think putting the additional coverage in the market for that day so you can service a customer three times a day is much more important that having it come overnight.

Operator: Thank you. This does conclude the question-and-answer session. I would like to turn the call back over to Mr. Rhodes for any closing comments.

William C. Rhodes, III - Chairman, President and CEO: Before we conclude the call, I'd like to take a moment to reiterate that our business model remains very solid. We remain excited about our growth prospects for the year. We can't take anything for granted as we understand our customers have alternatives. Our culture remains our key point of differentiation from our competition and we must not lose sight of the importance of basic store execution in order to remain very successful. We have a solid plan for 2012 and our team is well position to succeed, but I want to stress, this is a marathon and not a sprint. As we will continue to focus on the basics and never take our eye off, optimizing long-term shareholder value. We are confident AutoZone will continue to be incredibly successful. Lastly, I'd like to wish everyone a very happy and healthy holiday season and a prosperous New Year. We thank you for participating in today's call.

Operator: Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.