Unverified Participant William C. Rhodes - Chairman, President & Chief Executive Officer William T. Giles - CFO & Executive VP-Information Technology and ALLDATA.

Alan M. Rifkin - Barclays Capital, Inc. John R. Lawrence - Stephens, Inc. Chris J. Bottiglieri - Wolfe Research LLC Dan R. Wewer - Raymond James & Associates, Inc. Joshua M. Siber - Morgan Stanley & Co. LLC Simeon Gutman - Morgan Stanley & Co. LLC Seth M. Basham - Wedbush Securities, Inc. Mark A. Becks - JPMorgan Securities LLC Greg S.

Melich - Evercore ISI Chandni Luthra - Goldman Sachs & Co..

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 second quarter financial results.

Bill Rhodes, the company's Chairman, President and CEO will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 10 A.M. Central Time/11 A.M. Eastern Time. Before Mr. Rhodes begins, the company has requested that you listen to the following statement regarding forward-looking statements..

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

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

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

Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of our annual report on Form 10-K for the year ended August 30, 2014, and these risk factors should be read carefully..

Mr. Rhodes, you may begin..

one, great people providing great service; two, profitably growing our Commercial business; three, leveraging the Internet; four, leveraging technology to improve the customer experience while optimizing efficiencies; and five, improving inventory availability.

On the Retail front last quarter, under the Great People Providing Great Service theme, we continued with our intense focus on improving execution. Along with improvements to our product assortment, we're incorporating more training tools to help our store AutoZoners provide trustworthy advice.

Training will continue to be a large effort for us at the store level. Behind the scenes, we have increased our technology investment and challenged ourselves to make sure our offerings are relevant across all shopping platforms.

We realize as customers have become much more tech and mobile savvy, we have to have a sales proposition that touches all the ways they desire to interact with us. It is imperative we continue to invest in both current and future technologies in order to drive sales growth across all businesses.

Additionally, during the quarter, we completed our second ever company-wide engagement survey. We completed our first survey in the fall of 2012 and had terrific results. This year, our results were even better, which is a great testament to our culture and to the terrific leaders we have on our team.

It is so encouraging that our AutoZoners not only know they work for a great organization, but they are highly engaged in that work and feel proud to work for this great company we call AutoZone. Our AutoZoners are the most valuable asset we have. In regards to Commercial, we opened 29 programs during the quarter and 90 year-to-date.

We expect to open approximately 300 programs this year versus 424 last year. As we continue to improve our product assortment and availability and as we make other refinements to our offerings, we expect that the sales potential will continue to increase.

Our results continue to provide us with confidence to be aggressive in adding additional resources and new programs to this important growth initiative. We should also highlight another strong performance in return on invested capital, as we were able to finish Q2 at 31.2%.

We are very pleased with this metric as it is one of the best, if not the best, in all of hard lines 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 recognize our entire organization for their incredible effort to deliver another strong quarter of solid financial results, while providing Wow! customer service to all of our customers. Now, here's Bill..

Thanks, Bill. Good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our Retail, Commercial and International results. For the quarter, total auto parts sales, which includes our domestic Retail and Commercial businesses, IMC, our Mexico stores and our five stores in Brazil, increased 7.6%.

Regarding macro trends during the quarter, nationally unleaded gas prices started out at $2.82 a gallon and ended the quarter at $2.27 a gallon, a $0.55 increase. Last year, gas prices increased $0.15 per gallon during the second quarter, starting out at $3.29 and ending at $3.44 a gallon.

We continue to believe gas prices have a real impact on our customers' abilities to maintain their vehicles, and as cost reductions help all Americans, we hope to benefit from some increase in disposable income.

We also recognize that the impact of miles driven on cars over 10 years old, the current average, is much different than on newer cars in terms of wear and tear. Miles driven increased 1% in November. Data for December and January isn't currently available.

The other statistically highlight is the number of seven-year and older vehicles on the road, which continues to trend in our industry's favor. For the trailing four quarters, total sales per AutoZone store were $1.753 million. This statistic continues to set the pace for the rest of the industry.

For the quarter, total Commercial sales increased 14.5%. Commercial represented 17% of our total sales compared to 16% last year and grew $47 million over last year's second quarter. We opened 29 new programs during the quarter versus 49 programs opened in our second quarter of last fiscal year.

We now have our Commercial program in 3,935 stores, supported by 171 hub stores. Approximately 1,100 of our programs are three years old or younger. As Bill had mentioned earlier, both our total Commercial sales and sales per program accelerated from the previous quarter's results.

While our average sales per program is below some peers in our industry, we feel we are on the right track to methodically close that gap.

It's important to highlight that we accelerated our new program growth over the last few years as approximately 30% of our programs are younger than three years old, these openings have impacted our average sales metric and cannibalized some of our older programs.

However, our focus is on growing market share and improving our service levels by having more programs closer to our customers. Looking specifically at our mature programs, those at least five years old, they grew in the mid-single-digit range this past quarter.

Additionally, we still have significant opportunities to open additional programs over the next several years. We feel good about the success we've had in profitably growing the Commercial business. In summary, we remain committed to our long-term growth strategy.

We believe the improvements we have made and upcoming additional improvements from our inventory availability initiatives enhance our prospects, and we believe the addition of IMC will provide us with more avenues to service our Commercial customers very effectively.

We believe we are well positioned to grow this business and capture increased market share. Our Mexico stores continued to perform well. We opened five new stores during the second quarter. We currently have 411 stores in Mexico. As the U.S. dollar strengthened this past quarter, we did have an FX conversion headwind.

However, we still delivered a solid U.S. dollar equipment EBIT results and felt good about being able to handle the currency weakening in regard to the overall impact for the company's results. We expect to open a similar number of stores in Mexico this fiscal year that we opened last year.

Our returns and profit growth continue to be in line with our expectations. Regarding Brazil, we are currently operating five stores. We expect to open a few more stores over the next several months and then refine our offerings and prove that our concept works for our customers and is financially viable.

Once we refine our offerings and operations and evaluate the performance, we will provide you with an update on our long-term growth plans. Recapping this past quarter's performance for the company, in total, our sales were $2.144 billion, an increase of 7.7%.

Domestic same-store sales or sales for stores opened more than one year were up 3.6% for the quarter. Gross margin for the quarter was 52.2% of sales, up 15 basis points.

The improvement in gross margin was attributable to higher merchandise margins, partially offset by the impact from Interamerican Motor Corporation, which was acquired during September 2014. Looking forward, we continue to believe there remains opportunity for merchandise gross margin expansion within both the Retail and Commercial businesses.

The pressure we will experience in the IMC business, along with the rollout of further stores on more frequent deliveries from our distribution centers, will continue to cause headwinds to our overall gross margin rate. However, our primary focus remains growing absolute gross profit dollars in our total auto parts segment.

SG&A for the quarter was 35.4% of sales, 25 basis points higher than last year's second quarter. The increase in operating expenses as a percentage of sales was due to higher incentive compensation impact from the IMC acquisition and self-insured employee medical costs.

Partially offsetting these items was a favorable credit card litigation settlement of $5.4 million recognized during the quarter. While we have invested in several key initiatives that are customer service-related, like training and systems upgrades, we believe we are well positioned to manage our cost structure in response to our sales environment.

EBIT for the quarter was $361 million, up 7.1% over last year's second quarter. Our EBIT margin was down 10 basis points at 16.9%. Interest expense for the quarter was $34.5 million compared with $39.5 million in Q2 a year ago.

Debt outstanding at the end of the quarter was $4.4 billion or approximately $125 million more than last year's balance of $4.3 billion. Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR.

While on 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 approximately 35.2%, in line with last year's second quarter. We expect our annual rate to be closer to 36.5% on an ongoing basis as the deviation in results this quarter, like last year, was primarily driven by the government tax credits reinstituted in December of 2014.

Net income for the quarter was $212 million, up 9.8%. Our diluted share count of 32.5 million shares was down 5% from last year's second quarter. The combination of these factors drove earnings per share for the quarter to $6.51, up 15.6% over the prior year's second quarter.

Relating to the cash flow statement for the second fiscal quarter, our operating cash flow was $101 million. Net fixed assets were up 7.7% versus last year.

Capital expenditures for the quarter totaled $93.8 million and reflected the additional expenditures required to open 44 new stores this quarter, capital expenditures on existing stores, hub store remodels, work on development of new stores for upcoming quarters and Information Technology investments.

With the new stores open, we finished this past quarter with 5,042 stores in 49 states, the District of Columbia and Puerto Rico, 411 stores in Mexico, 18 IMC branches and five stores in Brazil for a total location count of 5,476. Depreciation totaled $59.9 million for the quarter versus last year's second quarter expense of $58 million.

This is in line with recent quarter growth rates. With our excess cash flow, we repurchased $26 million of AutoZone stock in the second quarter. At the end of the quarter, we had $544 million remaining under our share buyback authorization and our leverage metric was 2.5 times.

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 agency firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy.

Accounts payable, as a percent of gross inventory, finished the quarter at 107.5%. The inclusion of IMC reduced the AP ratio by 170 basis points. 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 $3.5 billion, up 12% versus the Q2 ending balance last year.

Increased inventory reflects the recent IMC acquisition, new store growth and additional investments in coverage. Inventory per store was up 7.1% at $631,000 per store, reflecting our continued investments in hard parts coverage and the IMC acquisition. The increase in inventory per store this quarter due to the IMC acquisition was $11,000 per store.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.2%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now I'll turn it back to Bill Rhodes..

Thank you, Bill. We are pleased this morning to report our 34th consecutive quarter of double-digit EPS growth, growing this quarter at a rate of 15.6%. Our company has continued to be successful over the long run. That success is attributable to our approach to leveraging our unique and powerful culture and focusing on the needs of our customers.

At the end of the day, our customers have choices, and we must innovate to ensure they turn to us for their vehicle solution needs. As we continue to invest in our businesses and monitor the results from our ongoing inventory initiatives, we are optimistic about our future. We feel like we continue to be on the right track.

Again, we are excited about our initiatives around inventory assortment, supply chain solutions, hub stores, commercial growth, Mexico, ALLDATA, e-commerce, Brazil and now IMC. Our long-term model is to grow new store square footage at a low-single-digit growth rate, and we expect to continue growing our Commercial business at an accelerated rate.

Therefore, we routinely look to grow our EBIT dollars in the mid-single-digit range or better in times of strength. And we leverage our very strong and predictable cash flow to repurchase shares, enhancing our earnings per share growth in the double digits. We feel the track we are on will allow us to continue winning for the long run.

We believe our steady, consistent strategy is correct. It is the attention to details and consistent execution that will matter. Our belief is solid consistent strategy combined with superior execution is a formula for success.

Our charge remains to optimize our performance regardless of market conditions and to continue to ensure we are investing in the key initiatives that will drive our long-term performance. In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves.

We are pleased with our results this past quarter, but we must remain committed to delivering on our strategic and financial objectives. Now we'd like to open up the call for questions..

Thank you. The first question today is from Alan Rifkin with Barclays..

Thank you very much, and congratulations on another nice quarter, guys..

Thank you..

First question for Bill Rhodes, concerns the delivery frequency program and increasing that.

Could you maybe just provide a little bit more color, Bill, as to when you think, if the program goes according to your plan, when peak spending to support the effort will occur? And maybe provide a little bit of color on the comp lifts that you're seeing to the stores that are supported already by the increase in frequency? Thank you..

That's a terrific question, Alan, and one that I don't want go in too in depth at this point in time. And one of the reasons why is we've been testing this in, I think, 168 stores in five different markets, and they're five very different geographies with different competitive sets and the like.

And our results generally have been good, but some parts of them are still hard to read, and that's why we decided to expand it by another over 300 stores.

And I think as we get the read on those stores, over the third quarter and fourth quarter, we will have a much better understanding to confirm that we're on the right track, hopefully to confirm that they're actually performing better than the ones we've done to date. It's just a little bit early.

Our expectation is once we make a decision, we're going to come back to you all and we'll communicate it clearly and show you what we believe the financial implications are on the operating margins and gross margins and capital expenditures..

Okay.

Is it reasonable to expect, Bill, that the frequency actually may vary depending on region where some stores may get deliveries three times a week and others will get deliveries as many as five times? Or are you going to do a unilateral approach across the board?.

I think at this point in time, everything is still on the table. We are testing three times, we're testing five times, we tested two times, and clearly, in some places, you're going to be very close to the store. So the cost of going five times is not as significant as if you're 500 miles away.

So I think we still have to determine those things, and that's why we expanded it to another 300 plus stores in the last month..

Okay. And one follow-up if I may, I believe you said that ALLDATA was slowing.

Can you maybe just provide a little bit more color as to what you are seeing there and what initiatives over the next 12 months are you going to take to reaccelerate that business?.

Yeah, I mean, ALLDATA continues to be the market leader in diagnostic repair software. And so what we have seen is a little bit more competition in the marketplace and a little bit more pricing pressure on the product. We continue to command a very large market share in that segment.

And our strategy over the next 12 months to 24 months is to continue to add enhancements to the product to service our customers better and add additional value. Some of that will be through repair information, confirmed repair information, we put a community website up today as part of the repair product, and that's been received very well.

So there's a lot of enhancements that we're making to our suite of products that we think over time will continue to create a larger stickiness with our customers and add more value..

Okay. Thank you very much, and good luck in the spring selling season..

All right. Thanks..

Thank you, Alan..

Thank you. The next question is from John Lawrence with Stephens..

Good morning, guys..

Good morning..

Bill, would you comment – your comment on the dilution of the EBIT margin at IMC, would you take a step further and if all these other initiatives on the rollout as far as multiple deliveries per week could over time offset some of that, would that not be correct if you looked out to the completion of that project?.

Actually let me – I'll jump in, John. I would say probably not. I would think of them differently. IMC operates at a lower margin business than the overall AutoZone business does. We think we can improve IMC's operating margin.

We think we can continue to grow that business, but it will continue to operate at a lower margin than our overall company and therefore will create a little bit of dilution on our operating margin. Now obviously when we anniversary that acquisition that occurred in September of 2014, then it won't be a year-over-year headwind per se.

Relative to delivery frequency, the play there is really to add some additional cost into our operating cost structure in an effort to increase sales, gain further market share and grow operating profit at a faster rate, and so, both of those will create a little bit of headwind from a pure operating margin rate standpoint.

But the objective obviously in both cases is to continue to provide better service and value to our customers, be closer to our customers with inventory and be able to capture market share and grow operating profit..

Great. Thanks. Congratulations..

Thank you..

Thank you. The next call is from Aram Rubinson with Wolfe Research..

Hi, this is actually Chris Bottiglieri on for Aaron Rubinson..

Good morning..

Hey, how are you?.

I'm good. Thanks. Very nice quarter. Had just a quick question on the Commercial program growth, so you took the growth down this year, but obviously the sales were up nicely.

Maybe you could just kind of walk us through your thought process there and your desire to slow that down, are your current inventory tests and field tests and delivery tests part of this? Is it to maybe realize that you grew too fast over the last couple of years or is it just kind of preserving capital to use it elsewhere in your business? Thank you..

Yes, great question. I'll start with – it was our plan this year as we came into the year to slow down a little bit. Remember, what seven years ago, we had 51% of the stores on the program. We now have 78% of the stores on the program.

We don't have a vision that 100% of the stores will have the Commercial program, but we do believe it will be significantly higher than it is today, we just don't know the exact number. The reason we slowed it down was one, we're later in the lifecycle of the program openings.

But more importantly, we really want to focus the organization more on growing mature programs and specifically growing our business with mature customers. As we've opened so many these programs in the last four, five years, taken a lot of time and attention away from the existing programs, it's also cannibalized the existing programs.

But this year, we really wanted to recalibrate our focus and focus intensely on growing mature programs and mature customers. And so far through the first six months, that's having some nice benefits..

Okay. That's great. I'll pass it on to the next person. Thanks for your time..

Thank you..

Thank you. The next question is from Dan Wewer with Raymond James..

Thanks. Bill, you'd noted that you were seeing the initial payback with your mature customers.

Does that reflect the fact that they're seeing the benefit of the better in-stock positions? And then second, what is the strategy for your top-down sales guys to become more aggressive and letting new accounts know about your greater commercial capabilities?.

A couple quick questions. Thanks, Dan. On the sales force side, we really started building a sales force about seven, eight years ago now. And I will tell you I am just – every time I ride with one of our salespeople, every time I talk to our senior sales leaders, I'm just remarkably impressed by the progress that we've made.

And unlike a lot of organizations where you put the salespeople out there to eat what you can kill, our sales processes are very well defined and our team determines exactly where we want our salespeople to be, the exact type of accounts and by the way, the exact accounts that they want them to call on that week.

So part of what we've done is we've redirected some of their focus and efforts to the existing stores or the existing customers that we have. And that's beginning to pay off, which we are still calling on new customers, but we really want to be focused on the ones that we have today. And I'm sorry I forgot your first question..

Well, it's just – I think you answered that, that the initial payback with the mature customers, that reflects the fact that you're able to say yes more often to their orders..

Yeah. Really so far, we've only seen one of the initiatives that we embarked on, and that was the change in our algorithms that we made last year to put newer inventory function to the customer. As we work on both this mega-hub approach and this delivery frequency approach, that can have a material difference in our ability to say yes.

And it is more important with the – it's important on both the Commercial and DIY side. With the Commercial customer calling me multiple times a day versus a DIY customer calling you a few times a year, it's very important on the Commercial side..

And just one other question. After you complete opening three additional distribution centers, your total network is still about half the number of DC locations that your competitors have.

Do you see this as just an intermediate investment and that someday AutoZone may operate 20 plus distribution centers?.

I would say at this point in time, absolutely not. We see this as the permanent solution. That doesn't mean that we won't get smarter over time and decide we need to drop another DC in here. But we have no vision of a 25 distribution center model. Now that being said, three years ago, we didn't have a vision of going delivery frequency.

And as our business has changed and as the competitive landscape has changed, we've had to modify our model. But today, we think that is the right long-term approach..

Okay. Great. Thank you..

Thank you..

Thank you. The next question is from Simeon Gutman with Morgan Stanley..

Good morning. This is Josh on for Simeon. Just a question on gasoline prices.

Are you seeing a noticeable pickup from lower prices? And then on the weather front, do you expect a pickup later on as a result of the colder weather right now?.

Yeah, it's always difficult to really measure with any precision on that. Clearly, the lower gas prices we believe have been helpful. And they certainty have probably contributed at some level to our comp, I don't think significantly, but they certainly have been helpful. So we try to weigh in all the things between gas and tax refunds, et cetera.

From a maintenance perspective, we think that as we – obviously this has been a longer winter and it's dragging on, but clearly spring will be here hopefully in the next couple of weeks, and then we'll get back to our core maintenance categories and things like that. And we expect those businesses to perform well.

So we'll have to get a little bit further down the road to look in the rearview mirror to see exactly what the impacts are of gas and whether. But we expect it to be favorable in the spring..

Hey. It's Simeon. If I can just ask one follow-up. Can you – I don't know if anyone asked this, so I apologize if it's redundant.

The loyalty card, can you talk about how helpful it's been to sales? Have you've been tracking it in terms of sign-ups, in terms of wallet share, in terms of driving traffic?.

Yes, Simeon. As you know, I guess we launched the first part of the loyalty program nine or 10 years ago, and then we took it to the digital program probably seven years ago. This past year, we used to have different programs in different parts of the country.

This past year, we went to one consolidated nationwide program, and the program has worked very well since the beginning. It continues to work well and it's growing, although it's growing at a lower rate just because it's more mature.

Now there have been two of our competitors that have launched loyalty programs in the last year or so, but both are different than ours. So far, we continue to be very help happy with our loyalty program and we continue to grow. We haven't seen material changes in our loyalty acceptance rate versus where we were before..

Okay. Nice quarter. Thanks..

Thank you..

Thank you. The next question is from Seth Basham with Wedbush Securities..

Good morning..

Morning..

Can we take a step back and just think a little bit more about the long-term financial model? You continue to expect mid-single EBIT growth or better, but it seems like you're investing a little bit more capital in DCs and whatnot, and some of these acquisitions.

So longer term, should we expect ROIC to continue to decline? Or is it going to be stable? How do you think about that?.

The way we really think about it is that, and as Bill, I think, highlighted in his remarks, we're very proud of the ROIC number that we have. And we recognize that it's probably one of the highest in hardline retail.

At the same time, we're very focused on investing in the initiatives that we believe will generate very strong returns and more importantly will capture market share and grow earnings.

So I think as we look at the model on a longer-term basis that we'll focus on those kinds of initiatives and they may or may not have some pressure on ROIC and bring it down a little bit. But again, we're focused on growing operating profit dollars, capturing market share and investing in activities that generate very strong returns..

Yeah, can I add to that too? If we held ourselves to a standard where we wouldn't make investments unless they were at 32% return on invested capital, we wouldn't do a lot of things that would be very important to our business and would frankly put ourselves at a competitive disadvantage.

That's why we've held to this long-term internal hurdle rate and it's worked very well. Remember when we implemented the internal hurdle rate, our ROIC was around 20%, so we've been able to grow it over time by being very disciplined, but at the same time, we can't hold single initiatives to a 30%-plus return..

That makes perfect sense.

If you look at the portfolio of initiatives you have right now, how do you think about them in a rank order in terms of the ROIC potential, whether it be IMC, whether it be delivery frequency, mega hubs, inventory additions, et cetera?.

I would say the first and foremost biggest short-term to medium-term opportunity is just growing the Commercial business. It's a very low capital required to grow that business, so anything that we can do, enhance our sales force, continue to improve our execution, that is by far and away the single biggest way to drive ROIC.

I think most of the other initiatives, based upon our modeling today, would be slightly dilutive to return on invested capital, but they have very good returns and they're going to accelerate the growth of operating profit dollars, which is one of our objectives..

Got it. Thanks a lot, guys, and good luck..

Thank you. The next question is from Christopher Horvers with JPMorgan..

Hi. It's actually Mark Becks on for Chris. I just wanted to sharpen the pencil on the trend. You mentioned your core business was up 200 basis points on a two-year rolling basis.

Outside of the 50 basis point contribution from tax refunds, is it safe to say the remainder is what you view as sustainable? I guess I'm just trying to get a sense of how you view the underlying growth rate of the industry versus potential share gains in the moving pieces with gas and whether..

Yeah, I think that well, first of all, I think to some extent, gas is probably a more longer-term one. I mean obviously, we're going to get some increases in gas prices. But on a relative basis, they will be well below last year. And I suspect that they will continue to be so for at least the immediate future. Relative to tax refunds, you're right.

As we called out, we think that maybe that was 100 basis points of impact on Q2. We'll have a better feel for that as we move our way through Q3. And then excluding that, I think that the way we look at it is that that really is the underlying core trends of the business..

Okay. If I look at DIY, historically it's been kind of a 1%, 2% growth business, and obviously that's with the benefit inflation which you're not seeing right now.

Is there anything structurally changing with the industry, or are maybe your thoughts on just the outlook for the Retail business in general?.

I don't think that we see anything necessarily structurally changing in the business. If you look at the competitive landscape from a pricing, promotional activity, even from a capital investment perspective, it continues to be pretty consistent and rational industry overall, and you are right.

We have not been the beneficiary of inflation over the last, almost at this point I'd say 18 plus months, maybe pushing 24 months, and it doesn't appear as though there's a lot of inflation in the horizon either.

There's a couple of categories here and there that have some inflation, but for the most part, we've been generating these sales out of a no inflation kind of environment. So it really is the strength of the customer, the strength of our offering that was really driving that..

Great.

And then a follow-up to Alan's question on the expanded daily delivery frequency, your 10% of your stores now, if you were to flip the switch and roll it out to a greater number, is there anything in terms of a particular stretch that you'd be able to do to add to a greater number of stores? Or how would you think about the timing of that growth?.

Well, I think it's still yet to be determined. We just went over and implemented 300 stores. Obviously, that's the biggest thing that we've done at this point in time.

We did it over about three weeks, and so far, it's gone pretty well, but there have to be a tremendous amount of efforts in the distribution centers to ramp up for that increase of activity both inside the warehouse and in the transportation team.

So we'll learn from this newest rollout and will plan for future wins, but more importantly now we got about 500 stores on the program and we are hopeful that we can quickly confirm our expectations today..

Okay. And one quick follow-up to that.

Given the potential for increased CapEx, should you continue to roll this out, do you think that would meaningfully alter your philosophy on share buybacks going forward?.

It won't alter our philosophy at all. I mean we believe that it is a great way to add value back to our shareholders and return capital back to the shareholders through the share repurchase program. We've been very disciplined about it. We operate at a very defined credit metric and will continue to do so..

Great. Best of luck..

Thanks..

Thank you..

Thank you. The next question is from Greg Melich with Evercore ISI..

Hi, thanks. I had two questions.

First was, how many stores now have the extended IMC inventory? So I think it was the 300 with the added inventory, but how many of those, or is it a different group that had the IMC?.

A different group. It's under 10..

It's just a handful..

Yeah, we've been doing this for six weeks or seven weeks so far, Greg. And we did a lot of work around the systems piece, but even now at this point in time, we're muscling it. We're just trying to get a sense for it. So far we've been really encouraged..

Very early days. Okay.

So then switching to CapEx and cash flow a little bit, if my math is right, you'll be opening or doing 100 Commercial programs each of the next two quarters?.

Yeah, roughly..

That's about right, yeah..

And then with given everything that you've talked about, what's sort of CapEx run rate? Should we look at the last six months as sort of a normal thing now to get all the initiatives done that you've talked about?.

I would say it's probably about that. We're certainly going to be right around about a $500 million number or so, I think, on an annualized basis. So it'll be a little bit of a step-up, but not significantly..

And on the AP to inventory ratio, it seems like that came down.

Was there any sort of timing issues there? Or again, just given everything you're doing on inventory that could be – we might see that effect kind of stick around for a little bit?.

I think the latter. I think that hopefully we were somewhat consistent two or three quarters ago when we began to add more inventory, and we tried to call out that that will put a little bit of pressure on AP to inventory when you fast-forward three quarters or four quarters, and here we are. So it was certainly down this quarter.

We don't anticipate it going down further, necessarily, for the next two quarters, but expect it to hang around that kind of number..

Great. Good job. Good luck, guys..

Thanks..

Thank you..

Thank you. The next question is from Matthew Fassler with Goldman Sachs..

Hi, guys. Nice quarter, this is Chandni Luthra on behalf of Matt Fassler. I just have two quick ones.

Could you give us the contribution of IMC to your SG&A?.

I think we said that it was probably around 15 basis points. I would say all three of those categories that we identified accounted for about 45 basis points....

Okay. Got it. And then just to get some clarity on the recent cold weather, particularly Northeast region.

Did it help? And what we're trying to basically gauge is, would the Northeast results have been any worse without the cold snap?.

Are you talking about the most recent cold snap? They weren't....

Yes. I mean basically the last month or so..

Okay. So about half of that was in our results. But remember, the cold snaps – as you get later in the winter, the cold snaps are more of a headwind than they are a benefit. Early in the season, it spurs activity of people trying to get their vehicles ready for the winter.

What happens late in the winter, most of the parts that were going to fail have already failed, and frankly customers have winter fatigue and they're not doing things getting ready for the winter. So they're generally not beneficial later in the year or later in the season as they are (56:59)..

Got it. Okay. Thank you..

Thank you..

Thank you. And that concludes the question-and-answer session. I'd like to turn the call back over to Mr. Rhodes for any closing comments..

Right. Before we conclude the call, I'd like to take a moment to reiterate that we have a long and strong heritage of consistent impressive performance. While we are excited about our growth prospects for the year, we will not take anything for granted as we understand our customers have choices.

We have a solid plan to succeed this fiscal year, but I want to stress this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful. Thank you for participating in today's call..

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