Bill Rhodes - Chairman, President and Chief Executive Officer Bill Giles - Executive Vice President and Chief Financial Officer Brian Campbell - Vice President, Treasurer, Investor Relations and Tax.

Michael Lasser - UBS Matt Fassler - Goldman Sachs Christopher Horvers - J.P. Morgan Simeon Gutman - Morgan Stanley Seth Basham - Wedbush Seth Sigman - Credit Suisse Elizabeth Suzuki - Bank of America Merrill Lynch Kate McShane - Citi Zack Fadem - Wells Fargo Bret Jordan - Jefferies Mike Montani - MoffettNathanson.

Good morning, and welcome to the AutoZone Conference Call. Your lines have been placed on listen-only mode 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 Third 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 10:00 AM Central Time; 11:00 AM 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, product demand, energy prices, weather, competition, credit market conditions, access to available and feasible financing, the impact of recessionary conditions, consumer debt levels, changes 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 cyber attacks 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 required 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..

Good morning. And thank you for joining us today for AutoZone's 2018 Third 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 third quarter, 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 slide complementing our comments today, are available on our Website www.autozoneinc.com. Please click on quarterly earnings conference call to see this.

To begin this morning, I want to thank all AutoZoners across the company for their efforts that allowed us to deliver solid financial results this quarter. And as we entered the third quarter, we were pretty optimistic about our sales prospects, since we were coming off the first reasonably severe winter in the last three years.

We anticipated seeing a significant acceleration in the sales of maintenance products as the harsh winter was hard on them and as the weather improved our customers would get outside and get caught up on their maintenance work. Unfortunately, we had a very cold wet spring through March and much of April.

And the anticipated acceleration in maintenance category sales for much of the quarter did not materialize. Instead two of our top performing categories were wiper blades and anti-freeze, not the categories you want leading the way in the spring.

Additionally, the northeastern Mid-Atlantic and Midwestern geographies did not excel as expected after the harsher winter. However, at the end of the quarter, the last two weeks when most of the country entered a dry hot weather pattern, our sales improved materially and in the geographies and the categories that we expected.

While we were disappointed with our sales for the quarter, they performed in line with our expectations from week-to-week based on the weather patterns we were experiencing. And we were encouraged when our sales responded when the weather turned more favorable.

We continue to be optimistic about the balance of this selling season, because we know there is significant deferred maintenance outstanding. Despite the headline sales performance, we had some encouraging results to highlight.

Our commercial business growth accelerated, increasing over 7% versus last year's third quarter and our revenue per program grew nicely. As we continue to enhance many elements of our commercial program, we are encouraged to see our business improve.

We have substantially enhanced our inventory availability over the past three years, and those improvements continue to strengthen our competitive positioning in the marketplace. Additionally, our commercial customers perform their work in garages, so the negative weather doesn't impact them as much as it does the DIYer.

This fiscal year-to-date, we have opened just over 90 new commercial programs and expect to end the year with approximately 150 new programs. International continued to perform well for us. We still expect to grow our international store base in both countries as we see years of opportunity ahead of us.

And we continue to refine and experiment with our omni-channel efforts during the quarter. We standardized our pricing across the Internet and stores by discontinuing the aggressive promotional discount for ship-to-home items only.

We've been concerned that offering different promotional offers to customers based on how they wanted their products fulfilled had the potential to create a channel conflict. As we look to the future, we see an environment where the distinction of online and offline gets very blurred.

Our omni-channel efforts are focused on interacting with the customer through their preferred means, in store, online, over the telephone via their mobile device, and then fulfilling that order to meet the customers’ desires and timeline in the most cost-effective manner.

And as some of you have noticed, we've also begun to test improved delivery speeds to home customers in select market. Across all sectors of the economy, companies are testing new ways to enhance the customer experience. We too are working on a variety of fronts, some will work some won't.

But in this age of innovation, it is imperative that we continue to find new ways to improve the customer experience and deepen our relationships with our customers. We will share more specifics about this test and others as we learn, adjust and then ultimately implement.

Today, our online ship-to-home business is quite small relative to the sales of the enterprise, but seizing the discount we had a negative impact on our sales, which also negatively impacted our overall same-store sales.

Look, our goal isn’t to get this balance right today, but to learn how best to leverage all of our assets and capabilities over time to strengthen our overall value proposition. In last quarter’s press release, we produced an adjustment to our GAAP numbers for the divestiture of two businesses.

This quarter the sale of these two businesses had a nominal impact on our operating profit. But given the nature of the business, it did benefit our gross margins by approximately 40 basis points. Initially, our tax rate came in at 27.2%, below our previous expectations at the beginning of the quarter.

We expect a rate in the range of 27% to 28% in Q4, and a lower rate next year as the full year lower federal tax rate is taken into account. Beginning at the start of our fiscal 2019, we will begin recognizing the full benefit of the changes and expect our ongoing global tax rate to be around 24.5%.

Overall, we expect the Tax Reform Act will benefit net income by over $200 million on an annual basis, realized over fiscal 2018 and 2019.

As we considered enhancement and profitability to the enterprise due to lower corporate tax rates, we discussed during our second quarter conference call, proactively investing some of these proceeds in an effort to improve our business for the long term.

We highlighted investing in wages and benefits to maintain our competitiveness with other retailers and investments in technology to improve our service levels across DIY and commercial, both with an enhanced omni-channel emphasis. Some of these investments are pull forwards of what has been contemplated in our long-term strategic plan.

We’ve begun to accelerate some of our technological investments, but that will take some time. As for wages, we continue to monitor market conditions and plan on executing our changes in our first quarter of next year in conjunction with our normal annual evaluation process.

Our enhancements will be focused on our more knowledgeable and tenured hourly AutoZoners. As this investment is unique, we want to add more clarity to you. We are modeling SG&A dollar growth to be in the 4% to 5% range over last year in our fourth quarter. We are in the later stages of developing our operating plan for fiscal 2019.

But based on our latest thinking, our expectation is that SG&A would grow in the 6.5% to 7.5% range. And as the wage adjustments will not become effective until the second half of our first quarter 2019 that quarter will not bear the full burden of those changes.

The wage changes are designed to ensure we can attract and retain terrific, knowledgeable AutoZoners, and to make sure our wages are competitive. The technology investments are designed to grow sales.

Regarding our internal initiatives, and specifically continually improving inventory availability at the market level, we continue to see a nice pickup in sales from the markets with mega hub capabilities. Mega hub stores are our stores with approximately 100,000 unique SKUs and provide delivery to surrounding stores and other hubs.

As our plan dictated this quarter, we opened three additional mega hubs, ending with 21 and are on track to have 25 locations opened by the end of the fiscal year.

Additionally, I would like to recognize our supply chain team for leveraging our warehouse delivery cost yet again this quarter, while starting up a new distribution center in Ocala, Florida. This mark the third sequential quarter where we have leveraged our cost.

And while we continue to be mindful of fuel cost increases and driver labor shortages across several carriers, we remain encouraged with the direction of our businesses costs are headed over the remainder of the calendar 2018. As noted earlier, we saw solid performance in our commercial business sales results in Q3.

Total commercial sales increased 7.3% for the quarter. We continue to grow our business much faster than the overall industry by executing on our game plan. With fewer year-over-year program openings, more of our sales growth is coming from existing customers or new customers in older programs.

We believe our inventory availability work is vital to these efforts and is enhancing our position in the market. I continue to give credit for our commercial performance to our store AutoZoners who are simply getting better at running our model. Commercial relationships take time to cultivate, and we are encouraged with their efforts.

Turning to our online efforts, and specifically in regards to helping our commercial customers, we are making investments to further enhance our digital capabilities. Our investments in technology are expected to help our customers get the parts they need faster.

We will continue to invest in our omni-channel strategies to ensure we can conduct business with our customers in the manner that best fits their needs and desires. On the cost front, I’ve highlighted the past few quarters the impacts we are experiencing from accelerated pressure on wages.

Those pressures continue to exist and are much more than historical norms. The regulatory changes are going to continue as evidenced by the areas that have already passed legislation to increase their wages substantially over the next few years.

And more impactful are the current market forces in retail as we all compete for talented employees in a very low unemployment environment. We are constantly working diligently to find new innovations to better manage our cost structure and those efforts will continue.

We believe this particular area will continue to pressure us for some extended period of time, which is why we are proactively leveraging a portion of the benefits derived from the recent tax law changes to invest in this incredibly important aspect of our business, our AutoZoners.

Our management team remains committed to managing this business for the long term to provide great service for our customers and great opportunity for our AutoZoners; ultimately, delivering strong shareholder value. We operate in an industry driven by in many cases inelastic demand.

If the part breaks or wares out, our customers need to fix it to get to work and get on with their lines. Because this predictability based on miles driven and an aging car population, we remain committed to continually improving our ability to aid customers in saying yes to their needs. Now, let me provide more detail on the quarter.

For the quarter, our sales increased 1.6% and our domestic same-store sales were up 0.6%. During the quarter, we opened 26 net new stores in the U.S. and our commercial business opened 38 programs. Year-to-date, we opened 75 net new stores and 91 commercial programs in the United States, 12 new stores in Mexico and two stores in Brazil.

We expect to open approximately 150 new domestic stores, 40 in Mexico and approximately 10 in Brazil for a total of 200. And we expect to open about 150 net new domestic commercial programs. Currently, 85% of our domestic stores have a commercial program.

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 in stress the importance of going the extra mile to fulfill our customers’ needs regardless of how difficult the request. With our commitments to service intact, we continued to be shared gainers over the quarter according to the data we have available to us.

Now, let me review our highlights regarding execution of our ongoing operating theme from 2017 that we carried over into 2018. Yes, we’ve got it; the key priorities for the year are, great people providing great service; profitably growing our commercial business; leveraging the Internet, yes, we’ve got it; and leveraging IT.

On the retail front this past quarter under the great people providing great service theme, we are committed to supporting our store AutoZoners. We’re focusing on enhanced training to store level AutoZoners and increasing the share of voice regarding availability with the yes, we've got theme.

We remain aggressive with our technology investments and believe these initiatives will help differentiate us on a go forward basis. We realize as customers have become much more tech and mobile savvy, we have to have a sales proposition that touches all the ways they desire to interact with us.

Our current and future technology investments will lead to sales growth across all of our businesses. We should also highlight another strong performance in return on invested capital, as we were able to finish our third quarter at 30.8%.

We continue to be pleased with this metric as it is one of the best, if not the best, in all of hard lines retailing. This metric is a key component of our pay-for-performance culture at AutoZone, and we demand our AutoZoners across the organization be accountable for our investment decisions.

Great ideas look wonderful on paper, but it's our job to deliver results. We are always learning from both successes and failures in our investments. Our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business to provide an acceptable return well in excess of our cost of capital.

It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we invest is our investors’ capital. Before I pass the discussion over to Bill Giles to talk about our financial results, I’d like to thank our AutoZoners for their efforts to continue to meet our customers’ vehicle needs.

This is not easy. I see everyday what customers expect from our AutoZoners, and they meet those needs with a smile on their face. Their efforts make our Company what it is today. We are bullish on our fourth quarter sales potential, because we have a great business operated by an exceptional team. Now, I’ll turn it over to Bill Giles..

Thanks, Bill and 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 part sales, which includes our domestic international stores, increased 3.2%.

For the trailing 52 weeks ended, total sales per domestic AutoZone store were $1,785,000. Total commercial sales increased 7.3%. In the quarter, commercial represented 20% of our total sales and grew $37 million over last year's Q3.

We opened 38 net new programs in the quarter, and we now have our commercial program in 4,683 stores or 85% of our domestic stores, supported by 192 hub stores. For all of fiscal 2018, we expect to open approximately 150 new commercial programs.

As Bill mentioned earlier, we remain confident we will continue to gain market share with our commercial customers. We are encouraged by the initiatives we have in place and feel we can further grow sales and market share. Our Mexico stores continue to perform well. We opened four new stores during the third quarter and year-to-date opened 12.

We ended the quarter with 536 stores and we expect to open approximately 40 new stores in fiscal 2018. And currency volatility remains significant and causes us to be deliberate with our pace of investment. Moves in foreign currency rate of greater than 5% from one quarter to the next are common.

Regarding Brazil, we did not open any new stores and now have 16 total stores open. Our plans are to add eight more locations over the remainder of fiscal year. While still running with an operating loss, our performance has improved and gives us optimism about the long-term future of this market.

As we further scale the business, we will improve operating performance. Long-term, we believe this market has the potential to be much larger than Mexico. Gross margin for the quarter was 53.5% of sales, up 86 basis points from last year's third quarter.

The gross margin rate benefited from higher merchandise margins and the sale of the two business units. While we continue to be optimistic on gross margin rate for the remainder of fiscal 2018, our primary focus remains growing absolute gross profit dollars in our business. SG&A for the quarter was 33% of sales, deleveraging 56 basis points.

Operating expenses, as a percentage of sales, were higher than last year, primarily due to deleverage on occupancy cost and increased store payroll. Earnings differentials and taxes for the quarter was $546 million in the third quarter. Interest expense for the quarter was $42 million compared to $36 million in Q3 a year ago.

Debt outstanding at the end of the quarter was $4,955 million. Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR, while in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions.

We remain committed to both our investment-grade rating and our capital allocation strategy, and share repurchases are an important element that strategy. For the quarter, our tax rate was 27.2% and 27.3% excluding the slight benefit received from exercising of stock options.

We expect our global tax rate to approximate 27% to 28% for Q4 and around 24.5% for fiscal 2019. I should mention the accounting for stock options this quarter benefitted our overall effective rate by a small degree, 8 basis points or $0.01 per share, but this is very hard to model for you and ourselves.

Any credits we receive are derived by stock option exercises that are determined at the discretion of our AutoZoners, as it’s impossible to predict and can cause unusual comparisons year-over-year. Net income for the quarter was $367 million, up 10.6% versus Q3 last year.

Our diluted share count of $27.3 million was down 5.8% from last year's third quarter. The combination of these factors drove earnings per share for the quarter to $13.42, up 17.3% over the prior year's third quarter. Looking to the cash flow statement. For the third quarter, we generated $503 million of operating cash flow.

Net fixed assets were up 5.6% versus last year. Capital expenditures for the quarter totaled $112 million and reflected the additional expenditures required to open stores this quarter.

Capital expenditures on existing stores, southern mega hub store remodels or openings, work on development of new stores for upcoming quarters, investments in our new and expanded domestic DCs and information technology investments.

With the new stores open we finished this past quarter with 5,540 stores in 50 states, the District of Columbia and Puerto Rico. 536 stores in Mexico and 16 in Brazil, for a total AutoZone store count of 6,092. Depreciation totaled $79.8 million for the quarter versus last year's third quarter expense of $75.3 million.

This is generally in line with recent quarter growth rates. We repurchased $400 million of AutoZone stock in the third quarter. At quarter end, we had $897 million remaining under our share buyback authorization and our leverage metric was 2.5 times. Again, I want to stress we managed 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.

As evidence of this commitment, we just recently surpassed $1 billion in annual share repurchases for the 10th consecutive year, bringing our life to date share repurchases to $19 billion. Next, I'd like to update you on our inventory levels in total and on a per store basis. The Company's inventory increased 3.7% over the same period last year.

Inventory per location was $650,000 versus $653,000 last year, and $671,000 just this past quarter. Net inventory defined as merchandise inventory plus accounts payable on a per location basis was negative $48,000 versus negative $47,000 last year and a negative $46,000 this past quarter.

As a result, accounts payable as a percent of gross inventory, finished the quarter at 107.3%. I also want to update you that we recently decided to terminate our pension plan. Our pension plan was frozen at the end of calendar 2002.

We expect to finalize the termination of the plan, including the transfer of plan assets and related liabilities to a third party. In connection with the termination, we anticipate taking a one-time non-cash charge of somewhere in the range of $130 million to $140 million in our fourth quarter.

Again, this is entirely non-cash accounting charge and we are excited to terminate this plan and eliminate the risks and volatility that it could produce. Finally, as Bill previously mentioned, our continued discipline capital management approach resulted in return on invested capital for the trailing four quarters of 30.8%.

We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now, I'll turn it back to Bill Rhodes..

Thanks Bill. As we head into the fourth quarter; we are encouraged by the traction we are gaining with internal sales initiatives; the investments we are making to improve customer service and product availability, the strength of our industry and the favorable macro trends; we are optimistic looking forward for the remainder of the selling season.

We are excited to intensify our focus on our core businesses, because we see these core businesses as tremendously attractive and in strong markets. We will continue our domestic and international expansion efforts growing roughly 200 locations annually.

We will continue to focus on growing our commercial business at an accelerated rate to the market growth. We will intensify our omni-channel efforts and we will leverage ALLDATA as the premier tool shops use in the automotive aftermarket. 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 2018 and beyond. As consumers continually look to save money while taking care of their vehicles, we are committed to providing the trustworthy advice they 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 Web sites and in-store experience, to provide even more knowledgeable service.

We don't ever expect an online experience to replace the advice our customers want, but today's customers do expect more information from a variety of sources on repairing their vehicles. This aspect of 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 nearly 39 years, and we continue to be excited about our future. Now, we’d like to open up the call for questions..

Thank you. We will now open up the queue for the question-and-answer session [Operator Instructions]. And our first question comes from Michael Lasser of UBS. Your line is open..

Bill, so you mentioned that the quarter turned out a little faster than you expected. So if we assume that you anticipated 2% to 3% comp coming into the quarter, and it finished maybe 150 basis points or so below that.

In your experience would you expect that you’ll recruit half of that or more from the weather being delayed from last quarter into this quarter?.

Yes, your general expectations of what we’re anticipating coming in this quarter are about right. And I’d go back to what we talked about in September. This industry, our sales over the last five years have traded in a very tight band. This summer we were a little bit disappointed by them.

As we move into the fourth quarter, I don't know whether we’ll recoup half of them or most of them. But as we look forward, we know that there is extensive deferred maintenance, particularly on the maintenance related parts. And that maintenance work is going to have to be done at some point in time.

You could see some of it was done in the commercial side with the way they were working in garages, but we just didn't see the rebound in those under car categories that we would’ve anticipated..

And my quick follow-up question is on the SG&A growth outlook or 6% to 7% for next year, that on a 52 to 52 week basis.

And is that going to be just a one-time increase next year or should we think about that as the new run rate for the business?.

No, I think of it is more of a -- and I appreciate the clarification. So when you think about FY19 on that increase in SG&A that’s a 52 to 52 week year comparison, and it excludes obviously those one-time items like the impairment charge in the pension plan termination, I think that's more one-time investment for us.

Obviously, we’re going to continue to make investments here and there. But those investments on wage rates and the benefits really to ensure that we've got the right AutoZoners in place and we’ve get a great tenured hourly AutoZoners out there, and we want to make sure that we continue to maintain that and be competitive in the marketplace.

So we think of that as more of a one-time investment, and then we’ll be more on a normalized run rate from that point forward. I think the investment in technology will continue to help drive sales -- those enhancements continue to get implemented throughout the year..

Michael, I’d like to add on that front too. If you recall back in 2006, we had a similar investment cycle. We were running about 17.5% operating margin at the time, and we felt like there were some things that we need to do to improve our execution for the long-term.

And we invested about 50 basis points of margin at that point in time, and our margin went down to about 17. Of course over the next 10 years that improved up to about 19.4%. We envision this the same way.

These are some things that we have opportunities to enhance our performance over the long term and feel comfortable doing them, but they’re one time in nature..

Thank you. Our next question comes from Matt Fassler of Goldman Sachs. Your line is open..

A little more clarity on the investing, obviously, you have to divestiture of the two businesses that took place I think respectively at the beginning the quarter, and then for IMC towards the middle of the quarter. And those would presumably take some SG&A out of next year.

So are we talking the specific guidance that you gave net of the reduction of SG&A for the sale of those businesses?.

No, just to be perfectly clear, those SG&As to get reallocated those have business units for the most part really were but not really contribute a lot of EBIT necessarily. So we’ll redeploy the assets that we have there both from an inventory perspective, as well as from an SG&A perspective as well..

So in other words, as you sell those businesses and presumably they generated some SG&A, the SG&A does not go down to reflect the disappearance to those sales?.

Not in the numbers that I’m giving you, that’s correct..

And then also, if you think about the impact on operating margin overall and the operating margin outlook overall. What’s your early thinking on gross margin? If you think about this particular quarter, your gross margin was up 8 basis points to 36 basis points, 46 basis points, excluding the impact of that divestiture.

So some of that momentum sustainable for the business going forward?.

Yes, we feel really good about gross margin. I mean I think the merchandising organization has done a terrific job as far as improving the sourcing, reducing costs. The supply chain team has gotten through some assess the year on more frequent deliveries and we felt that stabilize.

They’ve done a terrific job of opening two distribution centers over the last year. So we feel pretty bullish about gross margin, both from a merchandising cost perspective, as well as supply chain as well.

There is no question we’re getting some headwinds on transportation costs on supply chain, but the team has done a terrific job of managing expenses and being able to actually leverage supply chain this past quarter. So outlook wise, we feel pretty confident..

And then finally, do you have an IMC dollar sales number for this quarter just to clean it out of our models for that partial quarter contribution?.

It was relatively small. I don't have it Matt off the top of my head. It’s not a significant number. But we can -- we'll shoot that out at some point..

Thank you. Our next question comes from Christopher Horvers of J.P. Morgan. Your line is now open..

Also some follow-ups here on the prior questions. So in thinking about the recoup question, maybe you could give us a sense of what April look like for you relative to the total quarter. It looks like all the impact was pretty much seen on the DIY side of the business, which obviously is the preponderance of your business.

But how did April look relative to the quarter?.

The April looked -- it looked pretty tough in the first half of the week or first half of the month. The third week improved and then the fourth week was very, very strong. But the fourth week was the first time that we had really warm dry weather. And obviously, you can’t straight-line warm dry weather all the way through the fourth quarter.

But we were encouraged when the weather improved it met our expectations for what would happen in the business..

So is it fair to -- so likely I mean it would just mathematically turned negative in April.

So for down like that last week of March to mid-April, if we’re down one or two points, you would think that that's the upside potential or recapture potential as we think about the current quarter?.

We’ll wait and see as it turns out, there is no question. April was soft period and the weather wasn’t in our favor. And I think you’re hearing that from not just us but from others as well. And so what that means for the summer, we’re bullish.

We hope that that means more generation of sales from a lot of deferred maintenance that has transpired in the marketplace, but we’ll have to wait and see and see how this shapes out..

And then two more follow-ups.

So first, as you think about the benefit to gross margin from the divested business, is that state that 40 basis points pick around until we lapser it with?.

That’s roughly -- yes, that’s about right..

And then a question for Bill Rhodes. So big picture for many years you did it to comp and you drove this low double-digit earnings growth algorithm with the half of that coming from share repurchases. Now with the lower tax rate, you just drove the high-teens earnings on a modestly positive comp. You talked about SG&A growth next year.

But you get a big chunk of the tax savings next year as well.

So I'm just trying to understand how you think about the return to the shareholder in terms of the earnings growth outlook balancing the tax benefit versus the acceleration of investment?.

As you think about it, we’ve said several times that we’re going to recoup over $200 million net income on an annual basis. We’re talking about investing less than half of that into the long-term aspects of our business. And we're very comfortable with where we’re putting those dollars.

We’re really focused on two things wages of our hourly AutoZoners, the most tenured and most knowledgeable people that really help differentiate us in the marketplace. And we want to make sure that we are effectively compensating them in a environment. And then secondly, we’re going to making some pretty significant investments in technology.

Many of those are things we would have done, but we’re accelerating our investments in technology somewhat because of this tax reform. And so we will have an expanded investment profile next fiscal year. But once we get beyond that, we feel like we’ll be very good shaped..

And so do you feel comfortable with continuing to be able to drive a low double-digit type earnings growth algorithm?.

I would anticipate, once we get on the other side of it that our EBIT growth would be in the 3% to 5% range, and it will depend somewhat on the cash flow that we’re generating. And frankly, it depends a little bit on the multiples of stock as to how much the share repurchase program grants.

There were periods of time we were generating $1.3 billion in share repurchases and that would mean 5% or 6%, and sometimes it’s in 4%, 5%. So it somewhat depends on other factors as well..

Thank you. Our next question comes from Simeon Gutman of Morgan Stanley. Your line is open..

I want to focus on the commercial improvement. You mentioned, I think it was 7% and I think Bill Rhodes you implied that it was pretty steady throughout the quarter. Can you tell us if that 7% if there is a big range of growth rates during the quarter, or what that was? And you mentioned expanded inventory. I wonder if you can share more detail.

Are you selling across newer categories, new customers? Is fulfillment making a difference, or is the fact that you’re in stock the most important attribute?.

You packed a lot of questions in there let me try to unpack them. Yes, 7.3% growth were commercial for the quarter, we felt pretty good about it. It was variable. It is also variable based upon week-to-week performance of the weather, but it is less variable than the DIY business. It too came out of the quarter pretty strong.

As we think about the things that are driving that business, we’ve made tremendous investments over the last three years in making sure that we have the right delivery frequency for our cost model and optimizing our cost model, and also expanding our mega hubs, we’re up to 21 mega hubs now, looking it to be at 25 by the end of the year.

Those mega hubs really give us enhanced access to hard-to-find inventory. And as we continue to roll them out, we see that the mega hub itself does very well. The local market that it serves is improved, and then even the other stores that are attached to other hubs see improvement.

And then the other thing is our team, we’ve spent a lot of time, particularly over the last two years, getting our in-store teams focused on the commercial business, store managers and district managers intensifying their focus on the commercial business.

And I think all those things together are continuing to pay dividends, and will for an extended period of time..

My follow-up is just on the backdrop for the industry. And I am wondering, I guess the ultimate question is, if this summer will be the ultimate tail for this industry, whether demand is going to bounce back or it’s not going to be as good as it was in the past.

And I guess part of it, looking at the first quarter or this was your third, some months were good, some months were bad. I mean that just feels like it was par for the course, granted this -- the wet weather didn’t help.

But just curious, why should things get materially better from here? We think they will but want to get your thoughts, because the weather still seems to be the problem in what was a beginning of a cold quarter.

So trying to think about the summer if this will be the ultimate tail for a better run rate?.

I would hate to say one quarter is the ultimate tail for the run rate for our industry. This industry, as you very well know Simeon, it has been robust for 20 or 30 years. I did a presentation last week to our vendors at the Vendors Summit and talked about the 20-year run rate of this industry.

And the fact that the DIY marketing total has grown about 4% a year for 20 years, the commercial markets drove about 4.5% a year for 20 years, and that’s a total growth that not a same store basis. And I’ve said time-and-time again, I’m disappointed with a 0.6 comp, but it’s not a minus 6 comp.

I mean we’re continuing to trade within a pretty tight band. Look back over the last five years of the quarterly performance in it trades 3 to minus 1 or so, minus 1.8 I think. So I just don’t think that it’s radically changing by stress of imagination..

Our next question comes from Seth Basham with Wedbush. Your line is open..

Just thinking about the SG&A growth outlook, Bill, as you contemplated it when you spoke to us last year looking for 60 to 90 basis points of margin pressure from investments. Based on that that looks like you're expecting more pressure than.

What’s changed between then and now as you think about the outlook?.

I would say not much. I would say that it’s relatively consistent with the way we looked at it before. And in fact, most of the numbers are coming in pretty close to where we had originally expected them to. And we’ve always looked at this wages, benefit technology.

I think we’re relatively consistent on talking about those items sustain to places for which we are investing. There’s a handful of other ones that are less significant. But I would say for the most part the investments that we have lined up for next year are pretty consistent with the way we had thought about it.

And now the timing is a little bit different. We probably will implement more of them as Bill talked about in the middle of the first quarter, our fiscal first quarter to coincide with merit increases. But other than that, I would say it’s been relatively consistent..

As you think about the break down between benefits, wages and tech, what is that approximately?.

I would say that wages and benefits are the lion share..

Thank you. Our next question comes from Seth Sigman of Credit Suisse. Your line is open..

A couple of follow-ups here, first in terms of the DIY comp. I guess it was down roughly 70 bps on our math at least. Obviously, you had a weather impact but also cited negative impact from the online promotional changes.

Can you just give us a sense of how meaningful that may have been?.

It’s not terribly meaningful. It could be in the 20, 30 basis points range overall. Our online ship-to-home business is not a very big business for us. And so we wanted to make sure that we were incentivizing our customers to interact with us regardless of the channels that they wanted.

And so we make some changes and it negatively impacted the ship-to-home business, but it's not a big part of our overall business..

And then on the SG&A, if I’m specifically looking at the fourth quarter.

Can you just help us bridge that 4% to 5% growth versus the 3% this past quarter? I guess, just what are the incremental drivers in the fourth quarter?.

I think we’ll probably continue to see a little bit of wage pressure from the market overall. We do have some of the technology investments that are coming in during the fourth quarter as well. So those are some of the pressure points..

Just finally as I think about next year, given your positive comments around gross margin.

Do you think that operating margin can actually be flat or even up with the investments you’re making excluding the extra week?.

I think excluding the extra week, we’ll have to wait and see. We don't really want to give guidance on that relative to what our EBIT is going to be or even our operating margin. As I’ve mentioned before, we feel good about gross margin.

The organization has done a good job from a sourcing perspective from merchandising and reducing cost, team has done a good job. Obviously, we have some investments that we're going to undertake in SG&A, and we think that'll create momentum in the business..

Thank you. Next question comes from Elizabeth Suzuki from Bank of America Merrill Lynch. Your line is open..

Can you just talk about what you're seeing in inflation, and whether that benefit is starting to come through in the top line or in gross margins at all?.

I don't think we're seeing any significant impacts from inflation at this point in time. Obviously, oil prices have started to move up of late, and we're mindful of that. But so far, we haven't seen any material impacts of that.

As you know, we dealt with inflationary impacts over long periods of time and our industry and particularly our AutoZoners have been able to handle it pretty well..

So even inflation in terms of the product itself and price inflation, you're not seeing any of that yet?.

It's not terribly material. We see pushes and pulls. As you know, we have a significant effort going on to direct source, and that also helping lower our acquisition cost..

And then a longer-term question, I mean what do you see as the most important drivers going forward in 2019 and 2020 that really gives you confidence that the domestic sales rate can get back to those mid-single digit rates you talked about, or just that average over the last 20 years.

Because if things aren't radically changing, what do you think are the catalysts that get things going again from the 1% range back up into mid single digits?.

I think, number one, we control our own destiny. And I have a high degree of confidence in our team to continue to deliver. We've got some really exciting initiatives that we're working on. I think the biggest driver of our performance over the long term is going to be how do we perform in commercial.

It is the single biggest growth opportunity that we have in front of us today, we got about 3% market share. We're still pretty immature in that business and we got a lot of things that we're working on to improve that business. And they're showing that we're gaining traction.

So I continue to be very bullish about this business over the long period of time..

Our next question comes from Matt McClintock from Barclays. Your line is open..

I'd actually like to focus on the comment about strengthening the overall value proposition, and really focusing online. Clearly, you don't believe price or those promotions were part of that value proposition and you're talking about investments to strengthen that, and I'm just trying to understand the disconnect between that.

What can you do now that you couldn't do before online to strengthen that value proposition that allows you to wean yourself off of price and/or promotions? And number two, why is all this coming through right now, what was the driver behind this change? Thanks..

The driver to us is -- if you think about over the long term, where is this headed. How are you going to determine whether a transaction is online or offline? It's not going to be online or offline. It could be over the phone, it’d be over the mobile device or your desktop, it's how are we going to be interacting with customers.

And we want to make sure that we don't create channel conflicts. We feel like our value proposition is incredible, and we feel like a big part of that is the knowledge and trustworthy advice that our AutoZoners deliver to their customers, and be that over the phone, be that over chat, be that in the store.

And we want to make sure that we're incentivizing our customers to engage with us. And we don't want to create channel conflicts. So that’s what drove our decision..

Our next question comes from Kate McShane of Citi. Your line is open..

My first question was just with regards to what you’re seeing with the competitive response when you open a mega hub, or maybe more specifically.

Have you seen any change in the competitive response as you open more?.

I don’t think we’ve seen any competitive changes as a result of opening individual mega hubs. And all of us in the industry are taking different tactics.

If one of our competitors opens a new distribution center, we don’t change our operating model in that market, and I haven’t seen any material changes across any of the markets where we’ve opened these mega hubs..

And then my second question is about wages. I just wondered if you had any more detail about where the planned increase just like new and productive among other retailers.

And just how are you finding the stable market for us those that you want to hire?.

I think the labor market is continues to get tighter, so we’ve gotten further into the economic cycle. We’re at very, very low historical unemployment rate and we make no mistake about -- we’re continuing to hire great people every day. Our turnover rate is down slightly, so it's not like we’re dealing with a catastrophic situation.

We’re just trying to make sure that we continue to stay up in front of this situation. If you look at the regulatory environments, California and certain parts of the Northeast, you can clearly see what's in front of us from what those regulatory environment changes are going to be.

The bigger question is, and you read all the retailer announcements of what they’re doing with wages this year or over the last two years, or what they’re going to be doing over the next couple of years.

It is imperative that our AutoZoners be such an important part of our value proposition that we make sure that we’ve got the best people, and we’re going to make sure we continue to compensate them comparatively..

Our next question comes from Zack Fadem of Wells Fargo. Your line is open..

I wanted to follow-up on your comment on oil prices.

And just given your perspective, is there a high watermark for fuel price in which miles driven and that sales start to see negative impact? And with $72 oil today, I am curious where do you think we are on that demand elasticity curve?.

What we’ve seen over the long period of time, we talked about it publicly, is there seems to be a real tipping point around $4 a gallon, and we’re long-long way from $4 a gallon today. But we’ve had periods of time when we got there. And clearly, we saw impacts in miles driven during those periods of time. But we’re a long way from $4 a gallon..

And when you think about the work you’ve done on inventory availability.

Could you talk us through some of the incremental benefits that you typically see when you open a new mega hub? And also with the new DCs coming on as well, could you walk us through just general expectations for sales lift given the better anticipated availability?.

I wouldn’t say that the distribution centers are designed to really drive, they’re designed to drive improvements in cost, because they’re going to be servicing closer areas, so you’re reducing the stem miles.

But they’ll have slight improvements in service but those will be a little bit -- orders will get there a little bit quicker, so it’s really a more of a cost efficiency play. When you think about expanded coverage, our strategy on that is our mega hubs, and our mega hubs would carry close to 100,000 SKUs.

As we open those, we significantly improve the yes percentage, our ability to say yes to our customers in those stores. And we always, always see a significant improvement in both retail and commercial in that store sales. And those stores generally are leveraging that 100,000 SKUs over 20 to 30 other stores that are in their hub network, if you will.

And they’re delivering those parts for those stores three times a day, and we see significant growth in those stores. Then those mega hubs are also going to service -- some them don’t service any more hubs and several of them service four to six to eight additional hubs, and those can be on a same day or overnight basis.

But we see improvements in sales by every store that’s touched by the mega hubs..

Thank you. Our next question comes from Bret Jordan of Jefferies. Your line is now open..

On your test of free next day delivery, did you get anything from that? Is that something you're going to expand, and did it meaningfully drive the online sales in those markets?.

As I mentioned in the prepared remarks, we’re testing a variety of different things. And I appreciate the fact that you guys are so observant that you caught on to this test. But I don’t want to make a big deal out of it yet, because it’s early in our test and we’re trying to watch the different things to make sure that we can service our customers.

The one thing that we know is speed of delivery matters. And so we’re working on ways that we can deliver to our customers as quickly as possible, and that’s one of the elements that we’re testing. Let us get a little bit along in the test and then we’ll give you more clarity about where it is and what our plans are..

Did you get a commercial customer by end of that program, I mean given the fact that it’s quicker than your average online transaction. Did you see that it shifted beyond DIY at all? And then just as a follow up question on that commercial. In the commercial growth that you saw, which is pretty strong.

Could you just talk whether there was a bias of smaller shop or national account focus there?.

I would say, we’ll continue to perform very well both what we call the up and down the street and the national accounts, so we feel very good about both of them. As far as whether or not the commercial customers taking advantage of the next day delivery program, I am sure some of them are, that’s not what it’s designed to do.

And you got to remember, we’re delivering to these commercial customers usually in 30 minutes, next day would be a significant deterioration in service, so that’s really designed for the DIY customers..

Just wondering whether hard-to-find parts mix might on a next day delivery be something you could ship to commercial customers? Obviously, you’re not going to stock everything in your store about 30 minutes..

That’s a great point, Bret. But let's go back to what we were just talking about on the mega hubs. So the mega hubs have that extensive parts covered. So it’s not hard-to-find part, it’s generally to come out of that mega hub and they can get there sooner than next day in most cases..

Our next question from Gregory Melich from MoffettNathanson. Your line is open..

This is Mike Montani on for Greg, just quickly.

Can you clarify for the quarter, was transaction count positive or negative?.

Transaction count was down for the quarter little bit, but we continue to have good performance in our average transaction value..

And then just in terms of the reinvestment from the tax savings. We were initially thinking like 35% to 50% reinvestment so obviously, majority retention. And just quickly doing some math here, I am getting the inverse of that now.

Can you just help me understand did anything actually change there from your perspective on retention versus reinvestment, or is that just kind of a mix….

That’s just really consistent, I think on that one. I think that the dollar amounts are pretty consistent. As we said, we’ve got about $200 million worth of benefit from the tax reform act, and that probably a little less than half of that would be reinvested back in the business, and a little more than half of that would go back to shareholders..

Thank you. As of this time, there are no further questions. So I want to turn the call back to the speakers. Please proceed..

Thank you. Before we conclude the call, I would like to wish everyone a nice Memorial Day weekend and thank everyone that has served in our Armed Forces. We’re excited about our growth prospects for this year. We will not take anything for granted as we understand our customers have alternatives with a solid plan for future success.

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. Thank you for participating in today's call. Have a great day..

Thank you. And that conclude today's conference. Thank you all for joining. You may now disconnect..