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.

Matt Fassler - Goldman Sachs Michael Lasser - UBS Simeon Gutman - Morgan Stanley Kate McShane - Citi Mike Baker - Deutsche Bank Christopher Horvers - JPMorgan Seth Sigman - Credit Suisse Seth Basham - Wedbush Securities Matt McClintock - Barclays.

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 fourth 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 o'clock a.m. Central Time; 11 o'clock 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, 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 cost 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..

And now, I will hand the call over to Mr. Bill Rhodes, you may now begin..

Good morning and thank you for joining us today for AutoZone’s 2018 fourth 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 fourth quarter, I hope you had an opportunity to read our press release and learn about the quarter’s results. If not, the press release along with slides complementing our comments today, are available on our website www.autozoneinc.com. Please click on quarterly earnings conference calls to see them.

To begin this morning, I want to thank all AutoZoners across the company for their hard work, dedication and commitment this past quarter and year.

Our sales results for the fiscal fourth quarter improved from last quarter with May and August outperforming June and July and all months experienced positive comp store sales in both retail and commercial.

Sales results as many of you would expect were stronger in the Northeast, Mid-Atlantic and Midwestern markets and our harsh winter created parts failures in these markets. Our sales results, however, were noticeably below our expectations in several Western markets.

We attribute this sluggishness out west to comparatively mild and rainy weather for much of the summer versus last year. Our sales performance improved, we have certainly felt we had opportunities to do even better.

We executed a significant amount of changes in the second half of fiscal 2018 including product category changeovers, supply chain changes and we stopped our digital ship-to-home promotions.

In hindsight, this was a tremendous amount of simultaneous change and our execution while terrific in many areas didn’t meet our standard of flawless and negatively impacted our business. As we enter the new fiscal year most of these are behind us, we are improving quickly.

While we continued to gain share, the more robust market share gains we experienced in the first half of the fiscal year subsided in the second half and we are committed to regaining that momentum very quickly. We remain encouraged by the health of the consumer and the health of our business. We are bullish on our business for the New Year.

We continued to make good progress on our initiatives that are aimed at improving our ability to say yes to our customers more frequently, drive traffic to our stores and accelerate our commercial business. To remind everyone those initiatives for the past year included improving local market inventory availability, growing our U.S.

commercial business, leveraging the Internet and investing in IT at accelerated rates across the entire enterprise. Regarding enhancing parts coverage in the United States, we continued expanding our supply chain network in the quarter adding three new mega hub stores and 78 new stores.

In addition to opening two new domestic distribution centers over the last five quarters and expanding another, we are extensively leveraging our hub network to provide expanded parts coverage at the local level where the customer demands are immediate.

As you would expect we study our sales results in markets that receive additional parts coverage with hubs and we see noticeable increases in comp store sales when we open these locations. We rely on our mega hubs to act as distribution nodes for hard-to-find parts for their network stores.

We ended the year with 24 mega hubs, have been very pleased with their performance and expect to open many more in fiscal 2019. In our commercial business, we saw our best quarterly sales performance since Q1 2016 improving nearly 9% while having opened fewer than 150 net commercial programs for the year.

Our productivity for commercial program was very strong year-over-year. We were encouraged that this growth was from both winning more business with existing customers and gaining new customers. We are gaining momentum driving more sales through existing programs and customers, while still adding new customers all along the way.

And our accelerated investments in technological enhancements to improve our service and grow all of our businesses continues at a strong clip. We are investing at the highest levels ever for our company to deliver on some pretty aggressive internally established goals. One of those goals that we have been focusing on is next-day delivery.

At quarter end customers in 83 major metropolitan markets can place in order as late as 10 PM and have their orders delivered by early afternoon the next day. Our expectation is the majority of our shipped home orders will be fulfilled this way in the future.

Although this is not a significant part of our sales mix today, it is growing rapidly and we believe it’s another example of providing wow customer service and enhancing our value proposition to our customers. As we gain confidence in our ability to execute we will begin more aggressively advertising this unique and differentiated service offering.

Before getting into more detail about the quarter I want to share our perspective on some of the trends and tailwinds that our industry and specifically our business have seen. First, the customer appears to be getting healthier and the rebound in our industry sales this summer illustrated that improvement.

Some of this stems from the cold winter in a large part of the country that in turn increased demand of failure and maintenance related parts. Our business in cold weather markets easily outperformed the remainder of the country with the spread in comp sales between 200 basis points and 300 basis points throughout the quarter.

Surprisingly, we did not do as well out west, with comp sales noticeably weaker than other parts of the United States. We can attribute some of this weakness to a milder summer than last year, but we also believe we have some considerable opportunities for improvement. As I had said earlier, our quarter began very well in May.

However, it softened in June and July only to reaccelerate again in August. While our overall sales improved for the quarter, we believe they should have been more robust.

We had some significant vendor transitions in the second half of our fiscal year and several of those transitions did not go as planned, resulting in unacceptable in-stock positions and sales shortfalls in those particular categories. We have addressed those challenges and feel we are better positioned heading into the new fiscal year.

We also believe once these transitions are successfully completed we will be in improved competitive positions.

And as we opened our Ocala distribution center, re-optimized our supply chain and implemented our final multiple frequency of delivery schedule changes that too was a significant amount of change for the organization to absorb and we decided back in February, at the end of our second fiscal quarter, to eliminate online promotions for ship-to-home sales.

We were concerned about the potential channel conflict. After several months of being dark in promos, while competitors continued to promote, we became concerned that we potentially were or could negatively impact our customers’ value proposition of us.

As a result of eliminating promotions, those direct sales went from adding about 10 basis points to our comp to becoming a headwind in the quarter of roughly 30 basis points or approximately 40 basis points lower comp in the second half of the year.

While we were intentional with our removal of the promotions and believe long-term it may create more channel conflict, we recently reinstituted promotions to better assess their overall impact on traffic both online and in-store and overall sales. Combined, all these various issues negatively impacted our sales performance in the quarter.

While we will never flawlessly execute in every aspect of our business, this quarter we believe we had a disproportionate amount of opportunities and believe we have resolved most of them as we begin the new year.

Over the last year, we have been highlighting accelerated wage pressures and the impact those pressures have on our operating expenses in the upcoming year. We plan on investing in wages for targeted positions across our hourly store teams this fall with specific emphasis on the most critical positions and our most tenured AutoZoners.

It is important to note, those wages changes will go into effect midway through this, our first quarter of fiscal 2019. It is also important to note that means the first full quarter with the incremental expense will be our second quarter, which is always our most challenging profitability quarter.

In addition, we accelerated our investments in employee benefits and information technology. These investments will cause operating expenses as a percent of sales to increase. However, we do expect these investments over the long-term to improve our performance.

In fiscal 2018, our results included many moving pieces, the sale of two businesses and related impairments, the new tax law and this quarter, the termination of our pension plan and related settlement charge. Our expectation for 2019 is it will include far fewer unusual items or moving pieces. However, it will include two significant items.

In fiscal 2018, we enjoyed only a portion of the lower effective tax rates as our fiscal year straddled the tax reform changes. Next year, we will receive the full benefit and our blended tax rate will decline from roughly 30% to closer to 24.5%.

Additionally, we will have a 53rd week and our fourth quarter will include 17 weeks instead of the typical 16 weeks. To model the extra week, I encourage you to review fiscal 2013 and specifically the fourth quarter. We broke out the financials for that week in our earnings release showing how the extra week contributed to the quarter.

To conclude my comments on the macro economy, I would say the consumer is healthy and we think 2019 can be a solid year for us and our industry. Now, let me provide more detail on the quarter. For the quarter, our sales increased 1.3% and our domestic same-store sales were up 2.2%. During the quarter, we opened 78 net new stores in the United States.

For the year, we opened 153 net new stores and expect to open approximately 150 domestic stores in 2019. Our commercial business expanded by 8.8%, while opening 149 net new programs this year. Our commercial growth accelerated from last quarter’s 7.3%. We again expect to open approximately 150 net new commercial programs for this fiscal year.

Currently, 85% of our domestic stores have a commercial program. During the quarter, we continued to expand in Mexico, opening 28 new stores and we opened 4 new stores in Brazil. While we would hope to have up to 25 Brazil locations open by the end of the year, we expect these stores to open in fiscal 2019.

We have been doing business in Brazil since 2013 and we expect to accelerate our location expansions in 2019. Regarding the internet, we will continue to invest in our capabilities and customer experience. Our goal is to create a seamless omni-channel experience for our customers, meeting them where, when and how they want to interact with us.

We remain focused on improving our closure rates meaning converting customer requests for pricing and availability into sales. In the spirit of satisfying our customers, we are making ongoing system investments and enhancements to capture data about our customers’ shopping patterns across all of our platforms both domestically and internationally.

We understand we must be able to share information and process seamlessly between our stores, commercial shops, phone and online experiences to meet all of our customers’ needs. We expect our loyalty program and its vast membership to continue to help us mine customer shopping behaviors and grow sales materially in the future.

This remains a significant focus for us in 2019. As our primary objective remains growing our domestic retail and commercial businesses, we continued with our inventory availability initiatives to respond to the ever increasing challenge of parts proliferation in this industry.

This past quarter, we opened 3 additional mega hub locations and now have 24 in operation. We are working diligently on the development of future sites and we expect to open approximately 10 more in 2019. We now expect to ultimately operate a larger number of hubs and mega hubs than we previously planned. This number will evolve over time.

However, we feel a hub network for us is the most efficient way to provide enhanced local market availability.

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 investment and ensure we do it on a long-term profitable basis to provide strong returns for our shareholders.

We will continue to stress the importance of going the extra mile to fulfill our customers’ needs regardless of how difficult the request. Regarding Mexico, we opened 28 new stores this quarter and ended the year with 564 stores. We are planning to open another 40 stores next year.

In the local currency, Mexico experienced a solid quarter, while the exchange rate was a headwind to the reported U.S. dollar sales. The peso exchange rate was 7.3% higher than last year’s Q4 ending rate.

Sales in our other businesses for the quarter were down 48% over last year’s fourth quarter due to the divestiture of our AutoAnything business and lower e-commerce ship-to-home sales. As a reminder, our ALLDATA and e-commerce businesses make up this segment of sales.

We recognized that most of our site traffic is providing information to our customers prior to purchase. And our e-commerce platform represents an important part of our omni-channel experience. We see customers doing lots of research to learn about the products and how to do repairs.

While these businesses are small for us, the omni-channel experience is very important for our customer experience and we will continue to invest in this platform. With continued aging of the car population, we continue to be optimistic regarding trends for the industry both in DIY and DIFM.

As new vehicle sales are near all-time highs and gas prices while higher than last year remain range sound in the $2.80 a gallon area, miles driven continue to increase. We not surprisingly desire lower gas prices as the lower end consumer benefits the most from lower gas prices relative to income.

There have also been many questions about the impact tariffs could have on our business in 2019. Up to this point, we have not experienced material cost increases from tariffs. As for those SKUs impacted, we have successfully passed the cost along in higher retails.

However, a larger number of tariffs are slated to be imposed in the next couple of weeks. These tariffs should be more significant. In the short-term, we expect to be able to manage our way through any changes and we continue to expect to ultimately pass these costs along as the entire industry would be affected similarly.

Regarding commercial, we opened 58 net new programs during the quarter for 149 for the year. This was down from last year’s 202 open programs. Our expectation is we will continue to open new programs in the range of 150 in 2019.

As we continue to improve our product assortments and availability and as we make other refinements to our commercial offerings, we expect that our sales potential from this market will grow.

Commercial continues to be the most significant mid-term growth opportunity for the company as we currently have approximately 3% market share and we are determined to substantially grow that over time. We should also highlight another strong performance in return on invested capital as we were able to finish our fourth quarter at 32.1%.

We continue to be pleased with this metric as it is one of the best in all of hard lines retail. 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 to 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 would like to thank and reinforce how appreciative we are to our entire team’s efforts to continue to meet and exceed our customers’ wants, needs and desires.

All credit goes to our AutoZoners as we could not achieve our goals without their exceptional efforts they give each and every day. We are bullish about 2019 sales potential, because we have a great business operated by exceptional AutoZoners. Now, I will turn the call 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. For the quarter, total auto parts sales, which include our domestic retail and commercial business and our Mexico and Brazil stores, increased 3%.

For the trailing 52 weeks ended, total sales per AutoZone store were $1,778,000. For the quarter, total commercial sales increased 8.8%. In the fourth quarter, commercial represented 21% of our total sales versus 20% last year and grew $59 million over last year’s fourth quarter.

This past quarter, we opened 58 net new programs versus 99 new programs opened in our fourth quarter of last fiscal year. We now have commercial program in 4,741 stores or 84% of our domestic stores supported by 198 hub stores. In 2019, we expect to open again approximately 150 new programs.

As Bill mentioned a moment ago, we remain focused on growing this business. We are committed to having a great sales team supplemented with a stronger engagement of our store managers and district managers. We remain confident with the initiatives that we have and will have in place and we expect we will continue to gain market share in this sector.

Our Mexico stores continued to perform well on a local currency basis. We opened 28 new stores during the fourth quarter. At the end of the quarter, we had 564 stores in Mexico. We again expect to open approximately 40 new stores in fiscal 2019.

While the exchange rate worked against us this past quarter, the Mexico leadership team continues to do a fine job managing the base peso denominated business. Regarding Brazil, we opened 4 new stores and currently are operating 20 stores. Our plans are to grow an additional 19 stores over the next year.

While Brazil is run at an operating loss, we are encouraged by the sales per store being generated. We expect Brazil will grow its store base and may even surpass Mexico’s store count over time as we prove the operating model produces sufficient returns.

For the quarter, gross profit as a percentage of sales was 53.6% versus 52.8% the same period last year. The increase in gross margin was attributable to the impact of the sale of two business units completed during the year and higher merchandise margins partially offset by higher supply chain cost.

Our supply chain expense de-leverage was mainly due to diesel fuel costs being higher. However, there was some de-leverage from the opening of the new DC in Ocala, Florida. We continue to feel we can manage these expense categories throughout fiscal 2019. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment.

Operating expenses as a percentage of sales were 37% versus 32.6% same period last year. The increase was primarily due to the pension settlement charge of $130.3 million and domestic store payroll.

While we incurred significant charges related to the termination of the pension plans in the quarter, we are pleased to have terminated our qualified and nonqualified pension plans, eliminated any future expenses related to those plans and most importantly eliminated all risk associated with the plan’s asset performance.

Our team worked at this very hard and did a terrific job on this endeavor. While our reported EBIT for Q4 is $591 million, our adjusted EBIT calculated by removing the charges related to termination of the pension plans for the quarter was $722 million, up 2% over last year’s fourth quarter. Our adjusted EBIT margin was 20.3%.

Interest expense for the quarter was $54.3 million compared with $51.4 million in Q4 a year ago. The higher expense was due to higher rates we are seeing on our variable rate debt. Debt outstanding at the end of the quarter was $5 billion or approximately $75 million less than last year’s balance.

Our adjusted debt level metrics finished the quarter at 2.5x EBITDAR, while in any given quarter we may increase or decrease our leverage metric based on management’s opinion regarding debt and equity market conditions.

We remain committed to both our investment grade rating and our capital allocation strategy and share repurchases are an important element of that strategy. For the quarter our tax rate was 25.4% versus last year’s Q4 of 33.9% and as Bill said earlier on the call we expect the tax rate of approximately 24.5% in 2019.

Net income for the quarter decreased 7.7% over the same period last year to $400 million while diluted earnings per share decreased 1.6% to $15.02 per share from $15.27 per share in the year ago quarter. As previously disclosed during the quarter we terminated our qualified and nonqualified pension plans that have been frozen since fiscal 2003.

Adjusted for the charges related to the termination of the pension plans of $93.7 million net of tax, adjusted net income for the quarter increased 13.8% over the same period last year to $494 million while adjusted diluted earnings per share increased 21.4% to $18.54 per share from $15.27 per share in the year ago quarter.

Our diluted share count of 26.6 million was down 6.2% from last year’s fourth quarter. Relating to the cash flow statement for the fourth quarter we generated $824 million of operating cash flow. Net fixed assets were up 4.6% versus last year.

Capital expenditures for the quarter totaled $195 million and reflected the additional expenditures required to open 114 new locations. This quarter capital expenditures on existing stores, hub and mega hub store remodels or openings, work on the development of new stores for upcoming quarters and information technology investments.

With the new stores opened we finished this quarter with 5,618 stores in 50 states, the District of Columbia and Puerto Rico. 564 stores in Mexico and 20 in Brazil for a total AutoZone store count of 6,202. Depreciation totaled $108 million for the quarter versus last year’s fourth quarter expense of $103.1 million.

This was generally in line with the recent quarter growth rate. We repurchased $665 million of AutoZone stock in the fourth quarter. At quarter end we had $232 million remaining under our share buyback authorization and our leverage metric was 2.5x. Again, I want to stress we managed to appropriate credit ratings and not anyone metric.

The metric we report is meant as a guide only as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Next I would like to update you on our inventory levels in total and on a per store basis.

The company’s inventory increased 1.6% over the same period last year, driven primarily by new store openings. Inventory per location was $636,000 versus $644,000 last year and $658,000 last quarter.

Net inventory defined as merchandise inventory less accounts payable on a per location basis was a negative $75,000 versus the negative $48,000 last year ear and a negative $48,000 just last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 111.8%.

What I would like to call out is that last year’s first quarter experienced several natural disasters that impacted our sales and operating profit results. We called out 50 basis points to 60 basis points of comp tailwinds we received from the storms and $9 million of cost in last year’s first quarter.

Finally, as Bill previously mentioned our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 32.1%. We have and we will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now, I will turn it back to Bill Rhodes..

Thank you, Bill. Before I conclude I want to take this opportunity to reflect on fiscal 2018. The year certainly was an improvement from 2017, but also didn’t completely meet our expectations. However, our team continued to deliver some very impressive accomplishments and milestones.

In recognition of the dedication, passion, innovation, and commitment of our AutoZoners, I want to highlight that first our sales grew to a record $11.2 billion this past year. We grew same-store sales at 1.8%. We opened 150 domestic new stores and now have over 5,600 locations across the United States.

We opened 40 stores in Mexico, a tremendous accomplishment by that talented team. We are starting to ramp up our Brazilian operations as we expanded to 20 stores in and around Sao Paulo. Our supply chain after some significant changes is only getting stronger and is poised to leverage those improvements.

Between the distribution centers and mega hub locations we are beginning to see real sales traction of being able to say yes more than ever before. We expanded our highly successful mega hub strategy opening eight new mega hubs this year ending with 24.

And our team has done a wonderful job of introducing new out-of-the-box ideas like our market leading next day delivery option up to 10:00 PM. Most importantly, our customers are visiting our website at accelerated rates and using that research to inform their in-store visits.

And lastly we sold two businesses in AutoAnything and IMC to focus our resources on our core business, but we will continue to challenge ourselves our decisions, processes and strategies, we will always invest to reinforce our guiding principles, leveraging our methodologies of evolution over revolution and superior execution with consistent strategy is a formula for success.

We have an exceptional team that executes extremely well. Our focus remains on being successful over the long run. That success will be attributable to our approach to leveraging our unique and powerful culture and focusing on the needs of our customers.

To execute at a high level we must consistently adhere to living the pledge, we cannot and will not take our eye off of execution, but we must continually challenge ourselves to think differently and move more swiftly once conclusions are reached. Success will be achieved with an attention to detail and exceptional execution.

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

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 RIOC each quarter is how we measure ourselves.

This formula has been extremely successful over the last 39 years and we continue to be excited about our future. Now we would like to open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Matt Fassler from Goldman Sachs. One moment please.

[Technical Difficulty] will have disruptions at any point in time puts and takes in any given quarter, can you frame the magnitude of what you were trying to get done in this past fiscal year particularly the second half you spoke about the vendor changeover, etcetera, just to get a sense as to whether the ask you made on yourselves was that much greater than it had been in prior quarters, that would be question number one?.

Yes. It’s a terrific question, but I knew you didn’t come through that first, but I think I understand it, if I didn’t get it or don’t address it please clarify it for me. I think you got to look at two different things.

First and foremost we made a strategic decisions on discontinuing the e-commerce promotions that didn’t have anything to do with execution or transition that was a strategic decision that we made and that cost us about 40 basis point of comp. We want to make that clear, we turned them back on. We will see where we go from here.

We did not want to be in a competitive disadvantage position. On the transitions we just in hindsight I think we would look back on and say we took on a disproportion amount and too much in the second half of the year.

We always have vendor transitions going on and we always have distribution changes going on and hub stores and mega hubs opening we just had a little too much. And frankly several of these didn’t go as planned. And they were challenging during the implementation.

As we get finished with the implementation we are very excited we will be in a better competitive position and in most cases we already are. But it hurts a little bit in that six months period of time..

Thanks.

And then my second question relates to the next day delivery effort, can you talk about how you are going to fulfill these orders and what is this about what you are doing that would suggest that next day delivery should be proprietary as to you or to your channel and perhaps tougher for pure play e-commerce firms to execute if you think that that’s the case?.

I think I have to let you answer the latter portion of that. I will tell you that we have a world class logistics organization that we are working with. We have been working with – on this for some time. And we are really excited to be in a position to have this differentiated offering out there.

How long will it be differentiated, I think that’s yet to be determined, certainly we don’t know, but we are taking advantage of it. I am amazed that our organization from the time we had our first conversation about doing this.

We were up and running in a store in six months, that is remarkable and a great sign of the innovation that our team can drive. And now here we are a year later than that and we have it in 83 markets and 80% of the United States population can order as late as 10 PM and get a product on their doorstep tomorrow.

I think it just shows Matt that innovation doesn’t only rest on the West Coast, but there is a lot of people that are doing a lot of different innovations and leveraging technologies to improve customer service..

Thank you so much. I appreciate it..

Yes. Thank you..

Our next question is from Michael Lasser from UBS. Your line is now open..

Good evening. Good morning. Thanks for taking my question.

At the risk of asking an obvious question, you mentioned Bill that you are bullish on your sales in the industry environment in the upcoming year, does that mean it’s reasonable to expect that you will see an acceleration in both your DIY and your DIFM same-store sales results in the upcoming year?.

I think as you know Michael we don’t give guidance, so we don’t leave that you to guys, the experts. We are trying to tell you what we think is going on in the industry. I think Bill was very clear that in the first quarter we have something that we have to lap as pretty significant and that was the hurricanes last year.

Unfortunately, we got a large part of Carolinas that are going through that issue right now as well and we are certainly sympathetic towards all the people that are dealing with that. And I congratulate our team out there for doing a remarkable job, taking care of our business and our customers more importantly.

But as far as whether or not we are not going up or down from here, think there is a lot of moving pieces and we are not in the projection business..

With that being said, what do you anticipate inflation is going to contribute to the industry for the upcoming year both from underlying raw material and cost of doing business going up and then the potential for tariffs as well?.

Tell me what the tariffs are going to be, are they going to be 10% or 25%. They are 25% or if things stay for a long period of time that’s going to drive some significant inflation in our industry. And I will tell you over the long periods of time marginal inflation in our business is good.

And by the way, we are seeing inflation at accelerated rates in wages. So, we are not scared of marginal inflation, what we don’t want to see is shocks that shock the consumer..

Are you seeing inflation pickup as it stands today?.

Not materially. The categories that were impacted back in July with the tariffs, certainly those categories have seen inflation. On a broader level, we are not seeing it, but you are seeing it in various parts of the economy. So, fuel prices are up. Wages are up.

So we are later in the economic cycle and by the way things that normally happen later in the economic cycle seem to be showing up..

Okay, thank you so much and good luck..

Yes, thank you. Appreciate it..

Thank you. Our next question is from Simeon Gutman from Morgan Stanley..

Thanks. Good morning. First for Bill Rhodes, I want to talk about the online promotion and the next day delivery. So, you made the strategic decision to drop it and then in the not-so-long-after period it looks like its back with one of the better shipping or next day delivery programs in the industry.

Can you just talk about what caused that abruptness? Was it either the mass more tolerable or is there something that you are anticipating in the industry?.

I think it’s we have been out there for 5 to 6 months by ourselves.

It’s not lost on us that our competitive sales position that we are not growing share at the robust rate that we were for about 8 to 10 months before that decline and we want to make sure and prove to ourselves if it was only the 40 basis points of what was happening with online promotions, I don’t think we would have changed it, but we have got to make sure that it’s not changing the value perception of our consumer as they are beginning the shopping experience.

The vast majority of our customers begin their shopping journey whether they buy in-store or online. And so if that was changing the value perception, we have got to make sure that that’s not the case..

Right. And now your offer in theory leapfrogs what’s out there in the marketplace.

I mean is that fair or you were expecting this at some point from your competitors anyway, so you just might as well get there?.

I think we have a very differentiated offering right now, very different..

Fair enough. Okay.

And my second question for Bill Giles, to the extent we can talk about it on a 52-week basis, because you have I think the extra week, can we talk about just EBIT dollar growth? Are you planning for that for next year? I think you reiterated some of the comments around expense growing, but I just want to talk about EBIT dollars in totality?.

Yes, I think that to be honest with you I am just going to come back to the SG&A growth, I think that we had articulated that a couple of quarters ago and it seems as though the Street has digested that in the numbers that that they have got out there today and so no change from that perspective.

And I think you guys have to figure out what you believe comp is going to be etcetera and go from there, but I would say that to reiterate some of the things Bill had talked about before is that we do expect to make some of those investments.

Some of those are going to be in wage rates and some investment in technology and that will ramp during the year. And a big chunk of that was the wage rates and that will come in play towards the middle to end of Q1 and then in full force in Q2. So think about it that way as you are ramping your SG&A..

Okay, thanks for that and good luck next year..

Thanks, Simeon..

Thank you. Our next question is from Kate McShane from Citi. Your line is now open..

I was curious I think it was mentioned in the comments about the composition of comp growth and wondered if you could you maybe differentiate how DIY versus DIFM did during the quarter, how much was from new customer acquisition or a bigger basket or both?.

I would say in the call, number one, we said both retail and commercial were positive every period throughout the quarter or every month throughout the quarter. We gave clarity that commercial grew at 8.8% and we got that growth from new customers as well as existing customers and that’s accelerated from 7.3% last quarter.

We are quite pleased the productivity on per program basis was the highest we have seen in some time, the growth in productivity..

Okay, thank you.

And just to nail down the vendor transition piece, can you tell us what the timing was with regards to when it started to get a little bit more aggressive with the transition and when that will end?.

Yes. I mean first of all it’s one thing within, there were six or seven of these kinds eventually all happened in different times. But they really culminated over the course of the fourth quarter, had a little bit of the impact in the third quarter, most of the impact in the fourth quarter.

We still have a little bit going on now as we are finishing some of those transitions, but for the most part that’s behind us..

Okay. Thank you..

Thank you..

Our next question is from Mike Baker from Deutsche Bank. Your line is now open..

Thanks.

A couple of follow-ups, one the online promotions that you got – that you did well how – did that positively impacted your gross margins and so now as you put those back into play should we expect less gross margin gains ahead?.

Michael they definitely favorably impacted them slightly. But keep in mind these are relatively low volume in general, so not enough to really move the needle per se..

Okay.

And then the vendor transitions, so you – thank you for quantifying the impact of the online change to your comps, could you quantify the impact of the vendor transitions?.

Michael, we really can’t because it happened in different categories, different weeks, it’s just very, very difficult. We think it certainly had an impact, a negative impact on us in the quarter.

We also think it’s pretty much behind us at this point in time, but calling out a specific, it’s very easy on the online promotions we can put back behind that one, this one is more difficult..

Okay.

And then to sort of put these questions together, so presumably they were some one the 56 basis point maybe 70 basis point impact when you consider what you quantified for online plus the vendor issue, that seems to then offset the hurricanes, so is that a fair way to think about it, do you have some positives coming because those disruptions and changes are behind you offsetting the tougher comparison from last year’s hurricanes?.

Yes, I have no idea if they are going to perfectly offset, but you are absolutely right, we have some things in the quarter that we believe that we are going to execute better on going forward. We’ve made a change in the promotional activity online and we think that’ll be a benefit.

Obviously, we have some headwinds from Q1 last year and then TBD on what the impacts of the current year hurricanes will be..

Understood. Alright. Thank you for the color. I appreciate it..

Thank you. Our next question is from Christopher Horvers from JPMorgan. Your line is now open..

Thanks.

First a question on the gross margin outlook going forward, you have had some very nice sourcing benefits over the past few quarters, it looks like the supply chain, the fuel aspect turned sort of negative in this quarter and that offset that, but at the same time the benefit from the divested businesses accelerated, so could you piece those apart? How do you think about that 70 basis points going forward on the divested businesses? How do you balance out, is the sourcing benefit still going to outweigh the fuel supply chain headwind? How should we think about that?.

That’s a good question. I think that basically you are right, we had about a 70 basis point impact this quarter I think it was about 40 basis points, last quarter with just kind of a transition in third quarter. We had 40 basis points.

So when you go forward on Q1 and Q2 you would probably have something similar to what you had in Q4 and maybe little bit less. But you are right we did have some headwinds on supply chain specifically diesel fuel, so I suspect that that will continue to be a headwind for the next quarter or so.

We continue to make benefits from sourcing, merchandise and organization continues to do a good job of lowering acquisition costs, etcetera. But I think that will probably be a little muted versus what it had been particularly given some of the tariffs that might be coming on place etcetera.

So that’s on how I think about it going forward, I think up 70 basis points or so of benefit by not having the two business units and then some headwinds in the supply chain..

Got it.

And then in terms of the next day delivery, I think right now it’s free if you spend over a certain amount, how do you think about the cost of that to the consumer going forward, what you are going to charge versus if you had a standard 2-day delivery free over 35 or something like that? And also in terms of the – is this being sourced from stores and hubs or distribution centers, just curious how it’s being pushed out to the consumer?.

So, on the first part on whether or not we will charge for it, we don’t know the answer to that yet. We have charged for it in the past, a marginal amount, $1.99 and free next day delivery. Right now, it’s on there at zero. Right now, we have promotions out there on certain amounts.

We were going to work on modifying those over time to find the right sweet spot for our customer and for our business. As for where it’s being sourced, it’s being sourced from the local markets. That’s the only way that you can get it there for the next day.

So it’s coming out of those hubs and mega hubs, which is really a great opportunity for us to activate that inventory even better. If you think about it, 3 or 4 years ago we didn’t have any mega hubs. Today, we have got 24, if I might add 10 more next year and that really gives us, it puts us in a very different competitive position going forward..

Understood. Best of luck..

Thank you..

Our next question is from Seth Sigman from Credit Suisse. Your line is now open..

Operator, shall we go to the next person please?.

One moment please..

Operator, is there another question in the queue that we can go to?.

Excuse me. Seth Sigman’s line is now open..

Can you guys hear me?.

I am sorry about that..

My question was around market share, so you guys had talked about market share gains subsiding in the second half of the year.

I am just curious was that more about specific challenges that AutoZone was grappling with or did you actually see something different from some of your competitors? And then the other question would be just around the improvement in August as you started to address some of the issues you had earlier in the quarter, did you actually start to see market share gains reverse, start to accelerate again?.

Yes. For the latter part of that question, we have not seen August market share data completely yet, although I wouldn’t expect to see it in August. I think we are really improving, I think one of the questions we got earlier was did your market share change from May to June and July. The answer is no. And I want to make this real clear.

We continued to gain market share all throughout this, but we had more robust market share gains for 8 to 10 months before the safe February time period. What happened in February? We changed our cadence on online promotions. That clearly impacted us 40 basis points.

Did this customer value perception change and did that slow us down too, maybe, maybe not. That’s what we are testing to learn today. And then that’s also when we started hitting these vendor transitions.

Our competitors are always great competitors, whether or not they improve themselves or not, I don’t know the answer to that, but I know that we weren’t at our finest during that period of time. And I know we are in the process of correcting that..

And Bill, we are talking mostly about the DIY business, because the commercial business has continued to perform pretty well?.

No, I think the underlying trends in the commercial business are better.

The vast majority of the vendor transitions would have impacted commercial just as much as they impacted DIY if not more, because it’s more of a hard parts business and several of these were major hard part changeovers, which are very complex and very challenging and they just didn’t go flawlessly..

Okay. And my follow-up question is on the commercial business specifically, I think there was a period last year where you were using a third-party to help assess the strategy and there was a little bit of uncertainty at that point. Obviously since then, the business has continued to improve.

Can you discuss the changes that have been made that you think are helping drive that improvement? And then as you think about 2019, I think you have talked about getting to double-digit growth for the commercial business at some point, what will it take to get there?.

Yes, I wish I knew the answer to the last question. We can do it tomorrow if we knew what it would take. I think yes, we did a commercial study, a strategic review of our commercial business and we concluded it about a year ago. It came with some new concepts and we are trying some of those new concepts.

And we don’t know if they are going to work yet or not. We are very complicated and we are doing great things and I am proud of our team.

But that’s not what’s driving our business today, what’s driving our business today is our inventory assortment changes that we have made over the last 3 years with hubs and mega hubs and improved assortments in the satellite stores.

We have also got our store management teams both the district managers and the store managers much more involved in the commercial business so that they are not thinking about DIY first and commercial second that they are coming to work every day thinking, I am the store manager of both the retail and the commercial business.

And I think those things are just the blocking and tackling of what’s making the improvements in our commercial business today. I certainly hope to return to 10%. I am very encouraged by going from 7.3% to 8.8%. I am also encouraged by some of the strategic changes that we are looking at but it’s way too early for us to talk about any of those..

Okay. Thanks, Bill..

Yes, thank you..

Thank you. Our next question is from Seth Basham from Wedbush Securities..

Good morning.

My first question is around inflation, sorry if I missed this, but did you try to quantify what the impact on your comps for this quarter from inflation?.

We didn’t necessarily quantify the impact from inflation. We think inflation – there is a little bit of inflation in certain categories, but it hasn’t been significant. Obviously, marginal inflation as Bill talked is helpful for the industry and for us specifically, but we have seen moderate inflation..

Moderate inflation, okay.

And if we assume that the tariffs that are proposed to go through later this month, would you expect that the inflation environment will still be moderate and manageable or do you anticipate some transitional headwinds?.

Well, we think it’s manageable. I mean, one of the things in this industry is that we are very slow churn inventory business. So, whatever tariffs do arrive, we will have an opportunity to see what the impact is going to be on each of the categories, etcetera.

And historically, the industry has been very successful in being able to pass those cost on to consumers. So, that’s how we see it playing out..

Thanks. And my follow-up question is just around the overnight delivery offer that you have now, initially when you put this out you were leveraging FedEx to deliver these packages overnight.

Are you no longer using FedEx for this purpose?.

I think you can see that we are using a world class logistic operator in FedEx if you look at our website and they have done a wonderful job of helping us innovate on this front-end..

Okay. Thank you, guys..

Thank you..

Thank you. Our next question is from Matt McClintock from Barclays. Your line is now open..

Hi. Yes, good morning everyone.

Just real quick follow-up on the tariffs or more broader inflation, can you help me understand the elasticity of price increases for the DIY side versus the commercial side, how to think through that? I would assume DIY would be more impacted, but from a volume perspective, but I would just love to get your perspective? Thanks..

Historically, we haven’t seen that necessarily. The elasticity is not as great as you might imagine on many of the parts. Also consider that a big chunk of our business is failure related parts. So, those are required parts to operate your vehicle.

But, I would say historically, when you look back over time, the elasticity, even on maintenance side and even to some extent discretionary is not as great as you would think..

Thank you. That’s helpful.

And then just another follow-up on the overnight delivery, is this the missing piece to being able to have a real inflection and broader consumer acceptance of purchasing these products online?.

I don’t think there is any silver bullets that are out there. I think this is a normal part of the evolution of leveraging new technologies and new innovations. As we said in the call, this is a very small part of our business and we anticipate it remaining relatively small.

It’s growing fast right now and we are going to accelerate it as best we can, but at the end of the day, we believe the omni-channel experience is the most important.

We believe coming into our stores and engaging with our incredibly knowledgeable AutoZoners and having them help our DIY customers figure out how to maintain or repair their vehicles, is the most important part. This is just another avenue for us to meet those customers where, when, and how it’s most convenient for them.

So, I wouldn’t overdo it, but it is a great new innovation..

Thank you very much. Best of luck..

Yes, thank you..

Thank you. I will now hand the call back to Mr. Bill Rhodes..

Alright. Thank you. Before we conclude the call, I’d like to take a moment to reiterate that our business model continues to be solid. We are excited about our growth prospects for the year. We will not take anything for granted as we understand our customers have alternatives.

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

Thank you. And that concludes today’s conference. Thank you all for participating. You may now disconnect..