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Edited Transcript of AZO earnings conference call or presentation 4-Dec-18 3:00pm GMT

Q1 2019 Autozone Inc Earnings Call

MEMPHIS Jan 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Autozone Inc earnings conference call or presentation Tuesday, December 4, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Campbell

AutoZone, Inc. - VP of Tax, Treasury & IR

* William C. Rhodes

AutoZone, Inc. - Chairman, President & CEO

* William T. Giles

AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development

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Conference Call Participants

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* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Christopher Jerome Sullivan

JP Morgan Chase & Co, Research Division - Analyst

* Gregory Scott Melich

MoffettNathanson LLC - Partner

* Jonathan Isaac Gutfriend Livers

RBC Capital Markets, LLC, Research Division - Associate

* Matthew J. McClintock

Barclays Bank PLC, Research Division - Senior Analyst

* Michael Allen Baker

Deutsche Bank AG, Research Division - Research Analyst

* Michael Goldsmith

UBS Investment Bank, Research Division - Associate Director and Associate Analyst

* Seth Ian Sigman

Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

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Presentation

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Operator [1]

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Good morning, and welcome to the AutoZone Conference Call. (Operator Instructions) Please be advised, today's call is being recorded. If you have any objections, please disconnect at this time.

This conference call will discuss AutoZone's first quarter earnings release. 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 statement regarding forward-looking statements.

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Brian L. Campbell, AutoZone, Inc. - VP of Tax, Treasury & IR [2]

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(technical difficulty)

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

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

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

Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of the annual report on Form 10-K for the year ended August 26, 2017, and these risk factors should be read carefully.

Forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the risk factors could materially and adversely affect our business.

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

Except as acquired by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

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Operator [3]

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I would now like to hand the call over to Mr. Bill Rhodes. Please go ahead.

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [4]

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Good morning, and thank you for joining us today for AutoZone's 2019 First Quarter Conference Call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the 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, are available on our website, www.autozoneinc.com. Please click on Quarterly Earnings Calls to see them.

To begin this morning, I want to thank all AutoZoners across the company for their tremendous efforts during our first fiscal quarter. Their dedication and commitment to superior service resulted in a strong start to our new year. As we entered the quarter, we knew we had a difficult sales comparison due to the sales favorability we experienced last year from 3 significant widespread hurricanes.

Last year, we highlighted that our sales increased an additional 50 to 60 basis points from the effects of those hurricanes. Unfortunately, this fall, many people were also impacted by the 2 hurricanes that struck our shores and the terrible wildfires out west. While certain areas experienced significant damage, the effects of the storms weren't as widespread as last year, and the impact on our business this year was negligible. Unfortunately, we have AutoZoners and customers who were severely impacted, and we've worked diligently to help them where possible. Ultimately, considering the more challenging comparisons to last year, we were pleased with our same-store sales growth of 2.7%.

Regarding the cadence during the quarter, results were generally consistent except in the weeks and markets that we were lapping the hurricane events from last year. And the last week of our quarter was particularly strong, as much of the country experienced the first major cold weather, which accelerated our sales. Over time, weather effects normalized, but in certain weeks, it can have a meaningful impact on our sales.

We previously mentioned that our DIY market share gains were strong in the first half of last fiscal year, and that growth materially subsided in the second half.

Recently, our market share has continued to grow and improve slightly, which we consider encouraging as we are lapping the large gains we made this time last year.

As for regional performance, we continued to see strong results in the Northeast, Mid-Atlantic and Midwestern markets, while results were improving but still a bit subdued out west.

Our strong results in the Northeast, Mid-Atlantic and Midwest don't surprise us as the very cold winter and seasonal summer we experienced continued to generate benefits for us throughout this summer and fall. We were especially pleased to report that our commercial sales growth eclipsed double digits for the quarter, ending up 11.3%, marking our strongest growth quarter since fiscal 2015. We strive to show continued profitable growth in our commercial business, and we've intensified our focus on achieving much of that growth in existing programs. We've enhanced our inventory availability significantly in recent years. We have high-quality parts and products, many under the Duralast name, with a seasoned sales force, and now, we are increasing the engagement of our local store teams, particularly the store manager. And we were pleased with the results and the sequential improvement we have experienced over each of the last 3 quarters. We feel well positioned to continue strong growth for the balance of the year.

Overall, our business strengthened in Q1, and we were encouraged as we head into our second fiscal quarter. Every year, our second quarter is significantly more -- has significantly more volatility due to sales, widely varying weather patterns, and in February, March, due to the timing of income tax refunds. Additionally, it is the lowest-volume quarter of the year as we have closings and elevated expenses around the holidays. The second quarter is always our most challenging quarter.

During the first quarter, we launched our theme for the new fiscal year at our annual sales meeting here in Memphis in October. Our annual operating theme for 2019 will be focused on our drive for excellence. A relentless focus on what matters to our customers: exceptional service, fast deliveries, high-quality parts and products, flawless executions of changes in product assortments, in-store merchandising and on and on. We are focused on reducing non-selling tasks in our stores in order to reallocate that time, talent and attention to sales activities.

We continued executing our inventory availability initiatives during the quarter and opened 2 additional mega hubs. We now have 26 mega hubs in operation. Many investors are quite interested in our perspective on industry fundamentals heading into 2019. We've spent considerable time over the last few years discussing the weather, something I'm quite reluctant to do as there is nothing that we can do about it. And over the long term, weather impacts normalize and are not material drivers of the long-term success of this business or industry.

And I'd like to remind everyone of the long-term solid growth trends our industry has experienced in DIY and commercial over the last 3-plus decades. But at specific times in markets or regions, weather matters. Extreme heat and cold causes premature failure of parts and also accelerates the deterioration of maintenance parts. And in the spring and fall, when temperatures are milder, most deferred maintenance gets done if the weather is favorable. Fiscal 2016 and '17 had very mild winters, and our industry sales were softer than the couple of years before or last year. We don't know if this year's weather will be more or less conducive to our business, but we do know that our current industry fundamentals, including declining gas prices, are favorable.

And as our economy enters the later stages of an extended growth cycle, we know when economic times get difficult, our customers turn to us more frequently out of economic necessity to help them stretch their resources. We don't know what the next year will hold, but we have a high degree of confidence built off of nearly 40 years of experience that this is a very reliable, predictable industry over reasonable planning horizons, and we continue to be optimistic about our industry's prospects, and particularly, our company's prospects.

Another key topic of late is tariffs. The initial tariffs on raw materials weren't significant to us. Then 10% tariffs were expanded to broader and broader categories. We did not see a material cost increase from these tariffs in fiscal 2018 or in our first quarter because we were able to negotiate and offset some of the tariffs away based on the strength of the U.S. dollar.

Looking forward, the U.S. has agreed to postpone plans to increase tariffs from 10% to 25%. We will continue to monitor developments closely and working with our industry associations to share our concerns about the potential negative ramifications of ongoing and increased tariffs to our customers and the broader economy.

That said, our industry has much lower elasticity of demand than most other retail and distribution sectors. If your car won't start and you have to go to work, you or someone else has to fix it, period. This phenomenon has historically allowed our industry to pass on product inflation in higher retails.

Turning to our online efforts, we continue to invest in our strategy to enhance the customer shopping experience in an omni-channel world. We have initiatives in place to improve our in-store systems and websites, autozone.com, AutoZonePro, mobile and ALLDATA. In fact, we are investing more capital than ever before this fiscal year in improving these systems. We continue to see growth in website traffic as well as Ship To Home and Buy Online Pick Up In Store sales.

While representing a very small percentage of our business, we were pleased with the acceleration of growth that leverages our online platforms in both retail and commercial, and for retail through our Ship To Home, Buy Online Pick Up In Store and now, through our industry-leading next-day delivery program that allows customers in 85% of U.S. markets to order as late as 10:00 p.m. and receive their products at their home the very next day.

We're also working diligently to further enhance our digital capabilities with our commercial customers to ensure that they have a great, seamless, intuitive, no-hassle way to interact with us digitally.

In summary, we are pleased with our recent performance and encouraged about our industry's prospects for 2019 and beyond. Macro factors are currently in our favor, and we remain committed to not only maintaining, but growing our market share in both our DIY and commercial businesses.

Now let me provide a little more detail on the quarter. For the quarter, total auto parts sales increased 3.3%, and our domestic same-store sales were up 2.7%. As a reminder, we sold 2 businesses in the middle of fiscal 2018, including one, IMC, that was included in the total auto parts sector. Therefore, our total domestic sales comparisons include sales from that business in the total number, but those sales have no bearing on the same-store sales results in Q1. All 3 months of our quarter, September, October and November, were positive, with October being our strongest month. On a 2-year basis, the first 2 weeks in November was our strongest.

During the quarter, we opened 13 new stores in the U.S. and our commercial business grew by 11.3%, while opening 25 net new programs. Our commercial growth accelerated from last quarter's 8.8% increase, as we continued to execute on our strategies to grow sales. We expect to open approximately 150 net new commercial programs this fiscal year. Currently, 85% of our domestic stores have a commercial program. During the quarter, we had continued to expand in Mexico, opening 3 new stores. We did not open any new stores in Brazil this quarter.

Regarding our inventory initiatives in the spirit of "Yes! We've Got It." initiative, we continued our efforts around expanding our hub store network. We opened 2 additional mega hubs this past quarter and now have 170 hub stores and an additional 26 mega hubs, totaling 196 stores with significantly expanded parts assortments.

As we have seen both our DIY and commercial sales expand in markets where hubs and megas are added, we will continue to grow the number of hubs we have this year. We expect to open as many as 10 hubs for the full year, with most being mega hubs.

As a reminder, both our hubs and our mega hubs are focused on making available additional coverage to the local markets, meaning adding SKUs that would not have been available locally in our network before.

Previously, we relied on shipping these harder-to-find or slower-turning SKUs into the market when demand arose. Both of these efforts are designed to enhance our ability to meet our customers' needs for coverage and immediacy.

Along with improving our local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, provide our AutoZoners with a great place to work with opportunities for advancement and ensure we do it on a long-term, profitable basis to provide strong returns for our shareholders. We will continue to stress the importance of going the extra mile to fulfill our customers' needs regardless of how difficult the request.

Regarding inventory. On our last call, we highlighted that over the last 6 months, we had executed a significant amount of changes, including product category changeovers that we felt were disruptive to our company and negatively impacted sales during that time. We are happy to report that the majority of those challenges have been addressed and rectified, and those issues are predominantly behind us

As importantly, we've studied our opportunities for improvement in the future and have improved our planning and processes accordingly.

Now adding more color to our international operations, our 3 store openings in Mexico this quarter pushed our total store count to 567 stores. Mexico now represents 9% of our total store base, and this month marks the 20th anniversary of our first Mexican store opening in Nuevo Laredo. I'd like to congratulate the original AutoZoners who laid the groundwork and began this journey 20 years ago, as well as those who have built it into one of the premier retailers/distributors in all of Mexico.

For everyone past, present and future who has or will have something to do with the great service we provide to our Mexican customers, congratulations on 20 years of success and thank you for all you have done.

Sales in our other businesses for the quarter were down 38.9% versus last year's first quarter, but I wanted to remind everyone, last year's numbers had a business that was sold later in fiscal 2018, AutoAnything. We will not anniversary those lost sales entirely until this year's fourth quarter.

We will continue to make our omni-channel selling efforts a key focus for 2019. At the end of fiscal 2018, we reinstituted promotions online, as we had removed them at the start of calendar 2018.

Sticking with the promotions, we launched our next-day delivery in 80-plus markets across the country. About 100,000 SKUs were made available for next day, and this quarter, we expanded that availability to over 95 markets. While Ship To Home next day, Buy Online Pick Up In Store and commercial customer ordering are all showing growth and more traffic to our online sites, we continue to see customers primarily doing lots of research online and then coming into the store in order to receive Trustworthy Advice, Fix Finder, Loan-A-Tool and a host of other services that simply cannot be duplicated online prior to making the sale.

Our efforts in 2019 are to make sure our AutoZoners are freed up in stores to provide WOW! Customer Service for every customer.

While our online sales are small, substantially less than 5% percent of our total sales, the omni-channel experience is very important for the customer experience, so we will continue to invest in our digital platform.

With the continued aging of the car population and recently lower gas prices at the pump, these are contributing to our optimism regarding 2019 for both DIY and commercial. Trends remain encouraging.

Along with our operating theme for 2019, Drive for Excellence, we create key priorities each year. For 2019, these priorities for the year are customers first, commercial acceleration, omni-channel, leveraging technology and "Yes! We've Got It." inventory initiatives. We're spending a significant amount of time across the organization, but especially in stores, identifying areas where tasks can be simplified, streamlined or eliminated in order to free up time for our AutoZoners to focus intensely on customers and their needs. We hosted our national sales meeting in October and our messages were simple: intensely focus on customer service. That's what has made this organization legendary. And we will focus on simplifying things in stores to help free up time. We are making further technology investments to improve our electronic catalog and point-of-sale systems with the goal of putting the customer first. We believe our current and future technology investments will lead to sales growth across all of our businesses.

Regarding commercial acceleration. Along with opening 25 net new programs during the quarter, we've been investing in systems to help AutoZoners sell more efficiently and customers conduct business with us easier. While most of these initiatives won't be rolled out until late in calendar 2019, our focus on increasing the engagement of the broader store team and focusing on existing customers is really paying off. We have solid momentum heading into the new calendar year. Along with our usual program openings, we continue to improve our product assortments and availability. And as we make other refinements to our commercial offerings, we expect further sales growth.

We should, once again, highlight another strong performance in return on invested capital as we were able to finish our first quarter at 33.7%. We continue to be pleased with this metric as this is one of the best in all of hardlines retailing. However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return well in excess of our cost of capital. It is important to reinforce that we will always maintain our diligence regarding capital stewardship, as the capital we invest is our investors' capital.

Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to, again, thank and reinforce how appreciative we are of our entire team's efforts to continue to meet and exceed our customers' expectations. We're excited about all the initiatives we are working on throughout 2019, but everything starts with the efforts of our exceptional AutoZoners, and we thank them for that.

Now I'll turn the call over to Bill Giles.

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [5]

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Thanks, Bill, and good morning, everyone. To start this morning, let may take a few moments to talk more specifically about our domestic, retail, commercial and international results. For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, along with our Mexico and Brazil stores, increased 3.3%.

For the trailing 52 weeks ended, total sales per AutoZone store were $1,792,000.

Total commercial sales increased 11.3%. In the quarter, commercial represented 21% of our total sales and grew $56 million over last year's Q1. We opened 25 net new programs versus 30 programs opened in our first quarter last year. We now have our commercial program in 4,766 stores, or 85% of our domestic stores supported by 196 hub stores.

In 2019, we expect to open approximately 150 new programs. As Bill mentioned earlier, we remain committed to gaining market share with our commercial customers. And we're encouraged by the initiatives we have in place and feel we can further grow sales and market share.

Our Mexico stores continued to perform well. We opened 3 new stores during the first quarter, ending the quarter with 567 stores. We expect to open approximately 40 new stores in fiscal 2019.

Mexico business remains challenged by peso foreign exchange rate movements relative to the U.S. dollar. While our hope is 2019's exchange rate will settle down and will strengthen relative to the dollar, we are pleased with the Mexico leadership team's ability to manage this business through foreign exchange volatility.

Regarding Brazil, we continue to operate 20 stores. We have aggressive plans to open between 15 and 20 additional stores by the end of fiscal 2019. Our performance continues to improve, and we remain optimistic about the long-term future of this market. If we can prove success, this market has the potential to be much larger than Mexico. So while challenging, the size of the prize is significant.

Gross margin for the quarter was 53.7% of sales, up 90 basis points from last year's first quarter. The increase in gross margin was primarily attributable to the impact of the sale of the 2 business units completed the last fiscal year and higher merchandise margins. While we're asked about gross margin assumptions and the direction they will be headed, our primary focus has always been growing absolute gross profit dollars in our total auto parts segment.

SG&A expense for the quarter was 35.2% of sales, higher by 54 basis points from last year's fiscal quarter. Operating expenses as a percentage of sales were higher than last year, primarily due to the planned increase in domestic store payroll.

On the cost front, we highlighted on the last few quarters' conference calls, the investments that we would be making, specifically wage rates and technology, for this fiscal year. As we discussed, the majority of the wage rates would be implemented during the latter part of the first quarter. Although consensus may have had these investments starting sooner than they actually did in Q1, we feel that consensus numbers for SG&A for the remainder of the year are more in line with our expectations.

Also, I would remind everyone that fiscal 2019 includes a 53rd week. I bring this up to make sure analysts model that last quarter accordingly. We encourage folks to look at the last time we had a 53rd week, Q4 of 2013, as a litmus test for modeling. I'll add here regarding inflation and pressures on wage, we feel we have been good at getting out in front of the local market pressures, modeled accordingly and managed higher expense as well. From a regulatory standpoint around wage, there was nothing new we saw happening during Q1.

EBIT for the quarter was $488 million, up 4.1% over last year's first quarter. Our EBIT margin was 18.5%. Interest expense for the quarter was $39 million and in line with Q1 a year ago. We are planning interest around the $42 million to $43 million range in the second quarter of fiscal 2019 versus $39.3 million last year, Q2. The higher expense is due to assumptions on variable-rate interest being impacted by planned Fed funds rate moves in December.

Debt outstanding at the end of the quarter was $5,156,000,000, or approximately $173 million above last year's Q1 ending balance of $4,983,000,000. Our adjusted debt level metric finished the quarter at 2.5x EBITDAR. While in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy, and share repurchases are an important element of that strategy.

For the quarter, our tax rate was 21.7%, down from last year's Q1 of 34.6%. Along with tax reform this past year, we've benefited 250 basis points in our rate from stock options exercised during the quarter. Excluding this benefit, our rate was at 24.2%. Because it is impossible for us to predict when individuals will exercise options, we encourage folks to model us on a rate assuming no stock option impact, roughly 24.2%, and we will report both rates.

Net income for the quarter was $351.4 million, up 25.1% over last year. Our diluted share count of 26.1 million was down 7.1% from last year's first quarter. The combination of these factors drove earnings per share for the quarter to $13.47, up 34.7% over the prior year's first quarter.

Relating to the cash flow statement. For the first quarter, we generated $449 million of operating cash flow. Net fixed assets were up 4.1% versus last year. Capital expenditures for the quarter totaled $98 million and reflected the additional expenditures required to open 16 net new stores this quarter; capital expenditures on existing stores, hubs and mega hub remodels or openings; work on the development of new stores for upcoming quarters; and information technology investments.

With the new stores opened, we finished this past quarter with 5,631 stores in 50 states, the District of Columbia and Puerto Rico, 567 stores in Mexico and 20 in Brazil for a total AutoZone store count of 6,218.

Depreciation totaled $82.5 million for the quarter versus last year's first quarter expense of $78 million. This is generally in line with recent quarter growth rates.

We repurchased $497 million of AutoZone's stock in the first quarter. At quarter-end, we had $985 million remaining under our share buyback authorization, and our leverage metric was 2.5x at quarter-end.

Again, I want to stress we manage to appropriate credit ratings and not any one metric. The metric we report is meant as a guide only, as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy.

Next, I'd like to update you on our inventory levels in total and on a per-store basis. The company's inventory increased 2% over the same period last year. Inventory per location was $658,000 versus $663,000 last year and $636,000 just this last quarter.

Net inventory, defined as merchandise inventories less accounts payable, on a per-location basis, was a negative $59,000 versus negative $52,000 last year and a negative $75,000 last quarter.

As a result, accounts payable as a percent of gross inventory finished the quarter at 108.9%.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 33.7%. We have and we 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.

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [6]

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Thank you, Bill. While we had a strong start to our fiscal year, we are careful to not overcommit to any outcomes when it comes to our second fiscal quarter. The second quarter has perpetually been our most volatile quarter due to many things I've already highlighted.

We believe our industry's fundamentals remain very strong and are likely improving with the price at the pump decreasing. We've seen predictions that it will be a relatively harsh winter, but I'm not sure our insights into upcoming winters have traditionally been very strong. I know we will adjust and optimize our performance regardless of conditions, and we remain very bullish on the long-term fundamentals of our industry, both in retail and commercial. We're excited about our balanced model for growth around domestic retail and commercial, international, online and Pickup In Store. We believe our hubs and mega hubs, Mexico, ALLDATA and eCommerce can all grow their top lines in 2019.

To execute at a high level, we have to consistently adhere to living the pledge. We cannot and will not take our eye off of execution. We must stay committed to executing day in and day out on our game plan. Success will be achieved with an attention to detail and exceptional execution.

Our customers have choices, and we must exceed their expectations in whatever way they choose to shop with us. We are fortunate to operate in one of the strongest retail segments, and we continue to be excited about our industry's growth prospects for 2019 and beyond.

As customers continue to look to save money while taking care of their vehicles, we are committed to providing the Trustworthy Advice that they have come to expect. It truly is the value-add that differentiates us from any other faceless transaction. Customers have come to expect that advice from us. It is with this focus we will implement more enhancements on both our DIY and commercial websites and in-store experience to provide even more knowledgeable service. Service has always been our most important cultural cornerstone, and it will be long into the future.

Our charge remains to optimize our performance regardless of market conditions and continue to ensure we are investing in the key initiatives that will drive our long-term performance.

In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves. This formula has been extremely successful over the last 40 years, and we continue to be excited about our future.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) First in queue is from Simeon Gutman of Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [2]

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So Bill Rhodes, a 2-part question. You've talked a lot about this in the prepared remarks. Can you talk about what's been driving this steady improvement in the commercial the past few quarters and how to jump to double digits? And just the second part is, if there's any extent there's a difference in your answer, how do you narrow the gap over time versus your competitors?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [3]

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Yes, I'm not sure there is a difference. I think it's about blocking and tackling more than anything else, Simeon. As we mentioned in the last call, in the second half of the last year, our execution wasn't up to our standard across the enterprise. And we, as the senior management team and across the organization, really rededicated ourselves to the customer service across the organization. And on the commercial side, the biggest thing that we've done is we've enhanced the engagement of the local store team and, particularly, the store manager. They own that business, they have to own that business. Many of them grew up with retail only as their strength. And so as we've matured in this business, they're getting more and more involved, and I think that's leading to our success.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [4]

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And if we drill down, if you look at sales per account, or the number of accounts that you're selling to from a commercial standpoint, if you look at geography, if you look at stores that are benefiting more from mega hubs, is there anything that distinguishes what -- how the step-up is occurring or where it's occurring?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [5]

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I think there certainly are geographies that are outperforming others, and that's always the case based upon weather patterns or what happened last year. Probably the biggest difference over the last couple of years with our commercial business is, for 5, 6, 7 years, we were really focused on opening new programs, and that's where our sales growth was coming from. As those new program openings slowed down, we had to figure out ways to grow our business with existing stores and with existing customers. And I think that that's where we've been successful. I would also say that our traditional "up and down the street" business has been very strong, and that speaks to the same thing. Just focus on the customer relationship day in and day out, providing fast deliveries. I think the other thing is, more and more, the Duralast brand is becoming stronger and stronger in the automotive aftermarket. If you looked at it 10 years ago, a lot of people thought it was a weakness. I don't think there's anybody out there that thinks it's a weakness anymore.

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Operator [6]

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Next is Michael Lasser of UBS.

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Michael Goldsmith, UBS Investment Bank, Research Division - Associate Director and Associate Analyst [7]

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It's Michael Goldsmith on for Michael Lasser. So was there a pickup from the impact of inflation during the quarter, so that vehicle parts and equipment CPI accelerated in October? And are you starting to see prices go up as a result of tariffs? And then just also, has there been any rising prices in the goods you purchase from vendors as they experience some of the cost pressures out there, like wages?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [8]

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Yes, that's a great question. I would say that we've seen very moderate inflation, overall, but we are seeing a little bit. And so I would say some of our margin benefit this year continues to be the great work that our merchandising organization is doing at lowering acquisition costs across the board and our ability to continue to pass on retail pricing where appropriate for products that do experience some cost inflation. From a tariff perspective, we haven't seen a significant impact on this first round of tariffs. And, obviously, the Chinese currency was devalued, so there was some opportunity for us to mitigate some of those tariff increases. But I think our merchandising organization has done a great job of mitigating that. So, overall, I'd say a little bit of inflation, which we think, long term, will be helpful and continued ability to pass on some retail pricing.

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Michael Goldsmith, UBS Investment Bank, Research Division - Associate Director and Associate Analyst [9]

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That's helpful. And then recognizing that weather can have an influence, how does your outlook for industry growth next year compare to a normal year? And maybe what would a normal year look like at this point?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [10]

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I would just -- we don't give guidance, I want to be very careful on that. I would just encourage you to go back and look at what's happened over the last 6 or 7 years. I spent some time about a little over a year ago, talking about how tight the band is of our industry's performance and our performance. It just doesn't fluctuate significantly, and I just turn you back to look at what's happened since 2013, for instance. 2013 was a bad year with weather, and our sales were softer. '14, '15, '16 were stronger. So we'll see what happens.

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Operator [11]

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Next question is from Seth Sigman of Crédit Suisse.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [12]

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Bill Rhodes, following up on one of your points, thinking about some of the challenges that you highlighted in the fourth quarter, and I'm talking about the product changeovers, the impact from pulling away from that online promotion, I'm just curious if you could elaborate a little bit more on the changes you made in the first quarter. And if the issues that you were facing, were those fully addressed in the quarter? In other words, there was no drag on this quarter at all from some of those issues lingering?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [13]

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Well, we obviously corrected the online promotions about 1.5 weeks before the beginning of our first quarter. So that was up and running the entire quarter and, oh, by the way, it was enhanced by our next-day delivery program that was in 80-plus markets at the beginning of the quarter and ended in 95-plus market. So we had some benefit of rolling next day, but that's not a material driver. As far as the product category changeovers, most of them had recovered by the beginning of the quarter, but some of them still hadn't. And frankly, there's still a couple of them that we still have some lingering effects. But the vast majority of it was behind us as we came into the quarter.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [14]

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Okay. Okay, that's helpful. And then my question -- my follow-up is on the DIY business. One of your competitors had talked about weaker traffic and consumers maybe deferring some maintenance due to higher gas prices and product inflation. And, obviously, that was as of September, but I'm just curious, is that something that you guys have seen also? And if so, are there any signs that that's starting to reverse, particularly in light of your commentary and optimism for the lower gas prices that you're now starting to see?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [15]

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I would say that, that commentary is inconsistent with our experience. And I would also say, I'd add an exclamation point to it -- and we're talking about a different period of time. We’re talking about this quarter started at the beginning of September, ran through mid-November. That is inconsistent with what we experienced. And in fact, we spent a lot of time coming into this quarter, talking about the fact that we had those massive hurricanes last year. If you remember, I mean, they were significant in all of Southeast Texas, in particular, Houston. And then you had the whole South Texas and Central -- or sorry, South Florida and Central Florida were impacted, and then Puerto Rico, where we have a significant presence. Those were all impacted. So we were expecting to have a pretty tough compare coming into this quarter, and the performance that we had was certainly an acceleration over the performance that we had in the summer.

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Operator [16]

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Next question is from Mike Baker of Deutsche Bank.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [17]

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First, I wanted to ask you about the commercial business, and I was intrigued by something you said, that you were just implementing new systems for that business, but they won't really even kick in until the end of the year. So just to be clear, you're seeing an acceleration without even the benefit of those. And if that's the case, where do you expect commercial to go over time as you put in those systems? Do you have a sort of target percent of sales or anything along those lines?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [18]

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I would say that relative to the systems, I mean, we're always working on some things in order to enhance our ability to be able to do business with our customers on an easier basis, whether that be billings, looking at activity, et cetera. There's a host of things that we're working on today and will likely launch later in the calendar year of 2019. We feel great about the commercial business growth rate that we achieved in this quarter, being up double digits. Bill said it's one of the strongest performances we've had in a few years. And so we feel good about the momentum, and I think a lot of it just really gets back to the blocking and tackling. So the systems will be a benefit, but there's a whole host of other things that we're doing every single day in order to help drive commercial. So we feel good about where we are.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [19]

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Okay. One more question, just the -- can you tell us your Buy Online Pick Up In Store percent of eCommerce, where I guess customers are coming -- forgoing that 20% discount to come into the stores, what percent of your online sales is that?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [20]

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(technical difficulty)

[We have] Ship To Home, our next-day delivery program and Buy Online Pick Up In Store. Buy Online Pick Up In Store is the largest of those 3 segments by a pretty significant margin. So yes, it says that the customer needs that Trustworthy Advice. They need to figure out what do they need to fix, how do they fix it, do they need the tools, do they need the Fix Finder, all those things. That's what drives them into the store, and that's why this is the perfect channel, in my opinion, for an omni-channel experience, not just an online experience.

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Operator [21]

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Next, we have Chris Horvers of JPMorgan.

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Christopher Jerome Sullivan, JP Morgan Chase & Co, Research Division - Analyst [22]

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This is Jerry Sullivan on for Chris. Your peers reported seeing some pressure from rising fuel costs. What was your experience with fuel this quarter? And if fuel was a headwind to margins, were there any offsets on your delivery cost?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [23]

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Fuel was a little bit of a headwind. It wasn't significant, but, obviously, you see it as we do as well. We're encouraged by fuel prices coming down as of recent. So I think it was a little bit of a headwind in Q1, not significant, not worth calling out, but we hope that moderates going forward.

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Operator [24]

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Next is Matt McClintock of Barclays.

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Matthew J. McClintock, Barclays Bank PLC, Research Division - Senior Analyst [25]

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So 2 questions. The first one is just the next-day delivery, follow-up on that. I think you were 80% of cities or the country last quarter. Now you're 85%. Can you give us a sense of the uptake in terms of consumer interest in that offering that you've seen? And is it accelerating? And how should we think about that in year 2, year 3? Is this something that will build with brand awareness?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [26]

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That's a great question, and frankly, one that I'm not sure we have wonderful answers to because we're new on this journey as well. Yes, we went from 80% of the U.S. population to 85% of the U.S. population, including Puerto Rico. I would not expect us to get to 100%, and I would think that our growth from here would be fairly limited because you're talking about less dense areas of the United States. Is it continuing to grow? Absolutely. It's also, I would say, a minuscule part of our business today. So I don't want to get -- pump this up as some massive change in our offering. It is a really good offering for a customer who needs that service. And we are certainly the only ones in our sector and frankly, probably, leading all of retail for a customer to be able to order something as late as 10:00 p.m. and have it on their doorstep the next day. But it is, again, a very small part of our business. I hope it grows, and I hope that it satisfies customers and meets some of their needs that couldn't be met yesterday.

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Matthew J. McClintock, Barclays Bank PLC, Research Division - Senior Analyst [27]

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And just as a follow-up. You did a good job of outlining all of the improving macro drivers of the business and optimism as we progress through the year. Can you talk a little bit about tax refunds? There's a lot of noise out there about that potentially being a pretty strong positive as we get to that season in the spring.

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [28]

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Yes, I think we're still trying to learn what's going to happen with tax refunds. And frankly, every year, we are. What's the timing? That seems to be more certain this year than it was a couple of years ago. The real question is, what are people's withholding rates going to be versus the tax credits that they're getting? And this is all a brand-new world for everybody. So I don't think we have very good visibility into what that's going to mean. At the end of the day, I can't do anything about it except market into it. We will be marketing in the tax season regardless of whether it's bigger or smaller. So that's where we are at this point.

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Operator [29]

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Next, we have Seth Basham of Wedbush Securities.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - SVP of Equity Research [30]

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My first question is on SG&A guidance. Previously, you guys have talked about 6.5% to 7% SG&A growth for this fiscal year, excluding the impact of the 53rd week. Is that time -- is that guidance still intact?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [31]

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Yes. I would say that guidance is still intact, and I'd be a little bit -- sit towards the lower end of that range, but I would say that, that guidance is still intact.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - SVP of Equity Research [32]

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Great. And then my follow-up is around the commercial programs. You talked about the engagement of store managers helping drive improvement in commercial sales. Can you talk about what you've done to engage them and when you've made such changes, including any changes to the incentive compensation structure?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [33]

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Yes, we haven't made any changes to the incentive compensation structure. What we have done -- and again, you have to remember, we did grow up as a retailer. We were a retailer long before we ever got in the wholesale business, and most of our management team grew up as retail first, I call it. When they think they're fastball, it's retail. So one of the things we've done over the last -- I guess, starting in the fourth quarter is we started getting our store managers to make sales calls directly to the customers, so leave the store and go in the shop and make sales calls. In doing so, they certainly get a better understanding of the commercial business. They also have the opportunity to hear from their customers face-to-face what's going well and where the opportunities for improvement are, and that has just driven their engagement at a very different level than it was before. I applaud our team for coming up with this approach, and I think it's working at this point in time.

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Operator [34]

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Next line is from Greg Melich of MoffetNathanson.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [35]

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I had a couple of questions. One, you mentioned, I think last quarter, that the removal of promotions online had hurt comps by 40 bps. Is it fair to assume that putting them back on sort of gave you a part of that reacceleration? Or does it take time for that to kind of come back? And then I had a follow-up.

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [36]

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Greg, it definitely was 40 basis points. That was the direct portion, and I would say it absolutely came right back. So yes, that was a difference. The question that we had that really has been very difficult to answer is, there's a lot of customers that are going to our website and our competitors' websites to look for pricing and availability. If we are out there without a promotion and others are out there with a promotion, does a customer dig deeper into the website because of a price perception? And therefore, even though they're doing in-store purchases, do they -- do we get at a disadvantage by not being in that promotional effort? I don't know what the answer to that is. So it's definitely at least 40 basis points. It could be more than that.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [37]

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Got it. And you mentioned tariffs before. Could you help us frame that a little bit? It sounds like it's being mitigated really well. What percentage of your cost of goods sold or sales, or however you want to cut it, are on the current Section 301 list? In other words, in 60 days or 90 days, if we end up going to 25%, just help us frame what's on the list and what isn't as of today.

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [38]

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I don't have a number off the top of my head, Greg, to give you exactly what percentage of our CGS is impacted by the current tariffs that are going. Obviously, you're right. The next round is going to be broader if it does happen, and, obviously, at a higher rate. So there will be some impact from that. Traditionally, the industry's had a very good track record of being able to pass on increased prices to consumers. So we currently expect that to continue, but we'll wait and see.

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Gregory Scott Melich, MoffettNathanson LLC - Partner [39]

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Was the -- the 2.7% comp this quarter, was that all basket? Or was there some traffic or transaction count growth?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [40]

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It's predominantly basket. It's not really driven by traffic.

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Operator [41]

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Next is Scot Ciccarelli of RBC.

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Jonathan Isaac Gutfriend Livers, RBC Capital Markets, LLC, Research Division - Associate [42]

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This is actually Jonathan Livers on for Scot Ciccarelli this morning. A quick question on the commercial side, and you talked a lot about it already this morning. But given the industry trends, I guess, how would you think about, or how would you attribute the success, particularly in this quarter, to longer-term factors such as the cyclical recovery versus maybe shorter-term factors such as the better weather?

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [43]

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Yes, I wouldn't really chalk it up to either of those. You have to remember, our market share is only 3% in the commercial business. I think what we do dwarfs anything that's going on in the macroenvironment. And if you look at the succession of our growth the last 3 quarters, we've accelerated the growth and basically doubled where we were about a year ago. I don't think there's anything in the macro that would be contributing to that. And I also think -- I don't want to overstate that it was what we did in the fourth quarter with sales calls or anything else. This has been a long-standing program to improve our commercial business. If you look at the work that we've done over the last 3 years on inventory availability, our ability to say yes to our commercial customers' needs is vastly different than it was a few years ago. And as I mentioned earlier, the Duralast brand is becoming a really strong brand in the commercial side of the aftermarket. That was not the case years ago. So I think it's more about what we're doing and less about the macro factors.

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Operator [44]

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And our last question in the queue is from Bret Jordan of Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [45]

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Just another follow-up question on the commercial. It sounded as if a lot of what you're picking up is sort of up and down the street, independent commercial customers, as the manager's going out. Could you talk about what your mix of that independent versus national accounts is in commercial?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [46]

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Yes, I would say it's certainly way over 50%. It's the core of our program, and we're spending a lot of time and energy building that side of the business as -- the national accounts as well, but that is a healthy part of the business and continues to grow.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [47]

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Any feeling for who you're taking that share from? Is that mostly the independent distributors that are giving up the smaller commercial customer?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [48]

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I would go back to what Bill said before. We have such a very small market share today, we view everything as very greenfield and with significant opportunities. So I'm sure we're taking a little bit from everyone.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [49]

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Okay. And Bill, just a question, I guess, on inflation for next year. Obviously, we don't know what the tariffs will amount to, but when you think about just materials costs and higher rates on factoring expense, what do you think is sort of a base case for inflation in 2019?

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William T. Giles, AutoZone, Inc. - CFO and Executive VP of Finance, Information Technology, ALLDATA & Store Development [50]

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I think it's probably -- I don't know for sure, so I hate to get pinned down on a number, but it's probably in the 1% to 2% range.

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Operator [51]

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And that was our last question. Back to you, Bill.

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William C. Rhodes, AutoZone, Inc. - Chairman, President & CEO [52]

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Okay. Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be solid. We're excited about our growth prospects for the year. We do not take anything for granted as we understand our customers have alternatives. We have a solid plan to succeed this fiscal year, but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be successful. We thank you for participating in today's call, and we like to wish everyone a very happy and healthy holiday season and a prosperous new year. Thanks for your time.

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Operator [53]

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And that concludes today's conference. Thank you for your participation. You may now disconnect.