AutoZone, Inc. (AZO) Q4 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the AutoZone conference call. [Operator Instructions] Please be advised, today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will discuss AutoZone's fourth quarter financial results. Bill Rhodes, the company's Chairman, President, and CEO, will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 10 a.m. Central Time, 11 a.m. Eastern time. Before Mr. Rhodes begins, the company has requested that you listen to the following statement regarding forward-looking statements.

Certain statements contained in this presentation are forward-looking statements. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, positioned, strategy and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments, and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation: credit market conditions; the impact of recessionary conditions; competition; product demand; the ability to hire and retain qualified employees; consumer debt levels; inflation; weather; raw material costs of our suppliers; energy prices; war and the prospect of war, including terrorist activity; availability of consumer transportation; construction delays; access to available and feasible financing; and changes in laws or regulations. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of our annual report on Form 10-K for the year ended August 25, 2012, and these risk factors should be read carefully.

Mr. Rhodes, you may now begin.

Good morning, and thank you for joining us today for AutoZone's 2013 Fourth Quarter Conference Call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, IT and ALLDATA; 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 globe for another very solid quarter and year. 2013 was a very busy and productive year for us. We reached 2 amazing milestones in our company's history. First, we surpassed $9 billion in sales, finishing at $9.1 billion. Second, we crossed $2 billion in EBITDA, another amazing milestone, placing us an elite company across retail. AutoZoners past and present built this business through hard work, passion for customer service and dedication, and we owe them a great deal of gratitude. We've been growing our business on a variety of fronts. Our U.S. Retail business expanded again in 2013 with the opening of another 153 new stores. Our Commercial business continues to gain traction, growing sales 12.6% for the year, with 368 net new programs opened. We now have the commercial program in 71% of our domestic stores, having opened 762 new programs in just the past 2 years. We continue to expand our presence in Mexico, and we've opened stores in Brazil with 3 stores now in operation. We are expanding our online offerings in both our traditional autozone.com and autozonepro.com websites, and we acquired AutoAnything in fiscal 2013. Along with these strategic investments, we spend a lot of time on our core domestic Retail business. Our DIY business is by far the largest portion of our sales, and it is very profitable. We continue to see significant opportunities for new store growth, improved productivity in existing stores and enhancements to our profitability. This continues to be our #1 priority. As our Commercial business continues to grow, and it is intertwined with our Retail operations, we've studied our distribution model closely. The research we've done has led us to make some changes. We've determined over time that our hub stores, our larger market-centric stores, require additional inventory. Back in 2007, we would have said our hubs should be able to support surrounding stores with, on average, an additional 20,000 hard part SKUs. Our research indicates that in many instances, that isn't sufficient. We are being more aggressive with inventory assortments in our hub stores today than in the past. And due to our recent efforts on expanding the size and improving the location of our hubs, we have positioned ourselves to accommodate those larger offerings. In addition to these increases in hub store inventory levels, we are also embarking on tests to substantially increase product availability in all stores. Those tests are just beginning, and while we are certain some of the changes won't provide us with acceptable returns, we are confident we will find opportunities to further enhance our same-day inventory availability. Historically, our approach is one of idea generation, strategic assessment and then testing. While all of our tests aren't a success, many of them have developed into key long-term strategies. Our hubs in the new commercial strategy rolled out in recent years are 2 very good examples. We carefully analyze all of our tests to ensure we are achieving the desired results. We must 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 we must ensure we do it on a profitable basis to provide strong returns for our shareholders. That means we must have a high degree of confidence in our plans before executing on a broad basis. This week, in Memphis, we are hosting our national sales meeting all week. And again, during my address to the team tomorrow, we are introducing the idea of creating customers for life. We've always been focused on creating customers for life, but that will be our annual operating theme this year in order to intensify our focus on it. We've made significant systems investments and enhancements this past year in order to capture data about our customer's shopping patterns across all of our platforms. We understand we have to be able to toggle between the store experience and the online experience in order to meet our customer's needs. We have significant additional work in front of us, but the national sales meeting this week, we are introducing a new version of Z-net that will begin leveraging this information. This enhanced system provides our team with additional tools that will allow them to provide our customers with better trustworthy advice and more effectively and efficiently ensure that every customer has what they need to do the job right the first time. This system will be rolling out to our stores over the course of the first quarter. We have a very exciting year planned in 2014. I can confidently say we feel the actions we have taken and the investments we've made in 2013 position us to grow sales in 2014 across all of our lines of business. While 2013 was a solid earnings year for our company, flat same-store sales for the year was disappointing. There were many factors that influenced our sales performance in 2013, but the bottom line is we didn't meet our goals or aspirations and that's on us. It is time to grow sales in 2014. I can promise you, our game plan is well developed for the new year and our goal is to grow market share in 2014 while continuing to deliver solid earnings. Now let's turn to our fourth quarter results. Our sales increased 12% and, on a comparable 16-week basis, they were up 5.6%. Our domestic same-store sales were up 1.0% on a comparable 16-week basis. While we spent time the last few quarters talking about how the Northeast and Midwestern markets materially underperformed the remaining domestic stores, that was not the story this past quarter. Regionally, the Northeast performed better than the overall chain. However, our Midwestern states' performance was still lagging, albeit to a lesser degree. Also, we saw our maintenance-related sales accelerate this past quarter while their sales basically finishing on plan. From our perspective, the most important takeaways from the quarter were, first, certain failure-related merchandise categories underperformed this past quarter due, in our belief, to mild summer weather across most of the eastern United States. In particular, our air conditioning and battery businesses in this section of the country underperformed. Normally, we over-index in these categories during the summer months. In fairness, the last 2 summers had record-setting heat across most of the U.S. This year, it was milder. Second, this quarter, we had slower growth in our average DIY ticket versus last year. The lack of growth in our ticket was due to difficult comparisons in a select group of categories from the previous year. Inflation and producer prices was flat this past year and we haven't experienced nearly the same level of commodity-based inflation as we have in recent years. Therefore, our pricing at Retail was basically flat. We believe this trend will continue at least through the first quarter as pricing from our manufacturers has remained consistent. Third and encouragingly, our customer count trends improved significantly in Q4. While they were still negative on the quarter, we noticed a nice trend across certain non-weather-related merchandise categories and across the country. Fourth, we opened 173 new commercial programs in the quarter versus 107 programs last year. This acceleration in openings during the quarter allowed us to open 368 net new programs for the full year, reaching 71% of our domestic store base. To put our growth in this business in perspective, at the end of 2010, we reported $880 million in sales compared to $1.46 billion in 2013, up 66% in 3 years. And lastly, the capital allocation and earnings model for our company remains strong and intact. Our ability to effectively manage this business in good sales environments and not so good has allowed us to deliver 28 consecutive quarters of double-digit EPS growth. That consistently -- that consistency allows us to be shareholder-friendly through continual earnings growth and bondholder-friendly through a targeted investment-grade rating and financial transparency. We are excited about our opportunities to grow our business in both this quarter and future periods. We continue to manage this business for both short-term and long-term optimum performance. We continue to execute on our strategy to improve the customer shopping experience. We expanded 10 net additional hub locations during the quarter, take our total remodeled hubs to 92 locations. These remodels entail expanding the size and capacity of these locations, ensuring they're in the right physical location and adding additional inventory into the market that benefits both our Retail and Commercial businesses. We also opened 1 new hub location, finishing with 155. Lastly, I'd like to address the cadence of our same-store sales performance during this past quarter. In total, performance was generally consistent throughout the quarter, slightly stronger at the beginning of the quarter than the end. August was the weakest performing period for us, but we saw the results most challenged in regions that experienced cooler weather relative to last year. This was particularly evident in those categories I mentioned earlier, air conditioning and batteries. Overall, we have been encouraged by customer count trends and we believe the initiatives we have in place will allow us to gain share in both Retail and Commercial. As our sales results weren't meeting our expectations during 2013, we performed some extensive strategic assessments. We learned a great deal as a result of this work and we have accelerated the number of tests across the organization. I mentioned the expanded hub assortments earlier. These tests will take time to implement and evaluate, but many of them are in market today. We've completed one of those tests and are implementing it currently. This test was a refinement to our individual store inventory assortment methodology. We are leveraging more data than ever before, which allows us to have better store level product assortments. We are rolling this out by category and it will take about a year to complete. As is customary for us, we will continue to learn from our initiatives and roll out those that make sense financially. As previously mentioned, this quarter's results marked our 28th consecutive quarter of double-digit earnings per share growth. We're very pleased with our ability to consistently deliver strong EPS growth through our financial model of steady mid-single-digit EBIT dollar growth or better, along with high single-digit reductions in diluted share count through our share repurchases. Our goal quarter-over-quarter continues to be to provide consistency to our shareholders, our AutoZoners and our customers. We feel this targeted consistency in both financial performance, as well as execution of our key initiatives, results in stability and confidence for all of our key constituents. Next, I'd like to discuss our sales results for this past quarter in more detail. Our sales were up 12% for the full quarter and 5.6% on a 16-week basis. And our sales -- our same-store sales were up 1%. This quarter's same-store sales results compare to last year's fourth quarter comps of 2.1%. I should point out that our total Commercial sales were up 17% over last year's fourth quarter and 11% on a 16-week basis, driven by a combination of existing program growth and the addition of 368 net new programs over the trailing 12 months. Over time, we do expect to open more hub locations, but we believe our strategy on inventory deployment at the store level allows us to keep the number of openings at a moderate level. Our strategy is a steady one. Everyone's model is a little different. Our goal is to say, "yes," more and more frequently in an economically prudent manner. Regarding Mexico, we opened 21 stores this quarter and finished with 362 stores. Sales in our other businesses achieved very solid sales results. Our ALLDATA and E-Commerce businesses, which includes autozone.com and AutoAnything, continued to perform well, increasing 93.6% over last year. The significant increase was primarily attributable to the inclusion of AutoAnything, which we acquired during Q2 of this fiscal year. There are great opportunities for E-Commerce sales growth on both a business-to-business basis and to individual customers or B2C. While these businesses are relatively small for us at just 3.5% of our total sales mix on the quarter, we are experimenting to understand where the most potential exists. At year end, because of the long-term importance of this customer base and the integrated nature of our online and offline, we have decided to change the reporting on how we calculate our domestic same-store sales. Starting this fourth quarter, we have included our autozone.com business into our same-store sales calculation. The change is not significant. However, we felt this change was warranted as autozone.com complements our store walk-in business. Again, this change only affects our autozone.com sales and excludes the sales generated from AutoAnything. Our objective is to provide exceptional service to all of our customers regardless of how they interact with us and we believe that leveraging the Internet is a powerful tool to meet their needs, whether they are researching their purchase prior to visiting a store or having their products delivered straight to their home. With the continued aging of the car population, we continue to be optimistic regarding trends for our industry in both DIY and DIFM. While new car sales have been very strong these past 2 years, we have seen those traded-in vehicles be resold to new owners who are repairing or enhancing their "new vehicle." With gas prices flat year-over-year this -- well, this last fourth quarter, we see miles driven flat as well. Historically, a healthier economy has led to more miles being driven. We expect that trend to reemerge. We remain bullish on our industry sales growth opportunities on both the retail and commercial fronts over the long term. As the vehicle population remains at an all-time high and consumers continue to look for good values while maintaining their vehicles, we see AutoZone's opportunity to sell to these customers only growing. Now let me review our highlights regarding the execution of our operating theme for 2013, 1TEAM Delivering WOW!. The key priorities for the year were: Great People Providing Great Service!, profitably growing our Commercial business, leveraging the Internet, hub store improvements and finally, leveraging technology to improve the customer experience while optimizing efficiencies. On the Retail front this past quarter, under the Great People Providing Great Service! theme, we continued with our intense focus on improving execution. We have dedicated great resources to training our AutoZoners on customer service and we feel we continue to do a great job differentiating ourselves on this front. The fifth key priority on leveraging technology was new this year. As previously mentioned, the enhancements to improve the information available to our AutoZoners at the point of sale while also making them more efficient are in process and we look forward to updating you on the results in upcoming conference calls. We put a great focus on innovation and leveraging information technology to improve customer service and optimize efficiencies. Behind the scenes, we have reset our expectations on technology investment and challenged ourselves to make sure our offerings are relevant across all shopping platforms. We realize, as customers have become much more tech and mobile-savvy, we have to have a sales proposition that touches all the ways they desire to interact with us. Our current and future technology investments will lead to sales growth across all of our businesses. In regards to Commercial, we opened 173 programs during the quarter. For the year, we opened 368 versus 394 last year. Our expectation is we will continue to open a generally consistent amount of new programs in future years. The reacceleration of program openings during the fourth quarter was due to our increased confidence in our model due to the performance of our extensive new programs opened over the last couple of years. As we continue to improve our product assortments and availability and as we make other refinements to our offerings, we expect that the estimated sales potential from the market will only grow. Our results continue to provide us confidence to be aggressive in adding additional resources and new programs to this important growth initiative. We should also highlight another strong performance in return on invested capital as we were able to finish 2013 at 32.7%. While slightly below last year's ending ROIC, excluding the acquisition of AutoAnything, we would have been slightly higher than last year. We are very pleased with this metric as it is one of the best, if not 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 of capital. It is important to reinforce that we will always maintain our diligence regarding capital stewardship, as the capital we invest is our investor's capital. Before I pass the discussion over to Bill Giles to talk about the financial results, I'd like to thank and state how proud we are of our entire organization's efforts to manage this business appropriately and prudently. We have an amazing team and our initiatives for 2014 are really exciting. We are ready to continue to provide WOW! Customer Service to all of our customers and we are ready to continue to prudently manage our cost structure, providing our shareholders with the consistency we have exhibited in the past. Now here's Bill.

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 includes our domestic Retail and Commercial businesses, our Mexico stores and our 3 stores in Brazil, increased 10.3% on a 17-week basis. During the quarter, nationally, unleaded gas prices started out at $3.54 a gallon and ended the quarter at $3.61 a gallon, a $0.07 increase. Now last year, gas prices decreased $0.01 per gallon during the fourth quarter, starting at $3.79 a gallon and ending at $3.78. We continue to believe gas prices have a real impact on our customer's ability to maintain their vehicles and we will continue to monitor prices closely in the future. We also recognize that the impact of miles driven on cars over 10 years old, the current average, is much different than on newer cars in terms of wear and tear. Miles driven were basically flat for the quarter through the last month recorded, which is June. The other statistic we highlight is the number of 7-year-old and older vehicles on the road, which continues to trend in our industry's favor. Another key macro issue facing our customers today is the reinstitution of payroll taxes back to historic norms. This reduction in our customers' take-home pay began at the beginning of the new calendar year and at this point, it has been difficult to objectively quantify the ramifications of this change. However, we believe this is and will continue throughout the year to be a headwind to our consumers' spending habits. For the trailing 4 quarters, total sales for auto parts stores was $1.7 million. This statistic continues to set the pace for the rest of the industry. For the quarter, total Commercial sales increased 17.3%. On a comparable basis, Commercial sales increased 11%. For the fourth quarter, Commercial represented 16.4% of our total sales and grew $75 million over last year's Q4. Last year's Commercial sales mix percent was 15.6%. As we have said previously, overall, we've been pleased with the progress we are making in our Commercial business, both operationally and financially, and we remain on track with our plans. We believe there are ample opportunities for us to continue to improve many facets of our operations and offerings and, therefore, we are optimistic about the future of this business. We continue to believe we can grow revenues in existing stores and we will continue to open additional commercial programs. This past quarter, we opened 173 new programs versus 107 programs opened in our fourth quarter of last fiscal year. We now have our commercial program in 3,421 stores supported by 155 hub stores. Approximately 1,000 of our programs are 3 years old or younger. With only 71% of our domestic stores having a commercial program and our average revenue per program materially below several of our competitors, we believe there is ample opportunity for additional program growth in addition to improved productivity opportunities in current programs. While we recognize that our Commercial sales productivity per program is well below our peers, we believe the maturation of our marketing programs plus the inventory assortment additions we are making will allow us to close the gap. As we look forward, we're focused on building upon the commercial initiatives that have been in place for the last few years. We have a very talented sales force and we are enhancing training and introducing additional technology to optimize the productivity of this sales force. And we've increased our efforts around analyzing customer purchasing trends and in-stock trends. We will continue to test additional enhancements to our offerings and distribution model in order to better serve customers. In summary, we remain committed to our long-term growth strategy. We have accelerated the growth of our commercial programs, having opened almost 1,000 programs over the past 36 months. Effectively, 29% of the programs are 3 years old or younger. We believe we are well positioned to grow this business and capture market share and we believe we can scale this business in a profitable manner. We continue to be excited about our opportunities in this business for many years to come. Our Mexico stores continued to perform well. We opened 21 new stores during the fourth quarter and 41 for the full year. We currently have 362 stores in Mexico. Our returns and profit growth continue to be in line with our expectations. Now regarding Brazil, we opened 2 stores in the quarter and have 3 stores opened at the end of the year. Our plans remain to open 10 to 15 stores over the next couple of years and then reevaluate our development as we refine our offerings and prove that our concept works for our customers and is financially viable. At that point, we will talk more on our long-term growth plans. Recapping this quarter's performance for the company. In total, our sales were $3,095,000,000, an increase of 12% from last year's fourth quarter. Domestic same-store sales, or sales for stores opened more than one year, were up 1% for the quarter. Gross margin for the quarter was 51.8% of sales, flat compared to last year's fourth quarter. Now while flat, improvements in gross margin were attributable to lower acquisition costs, offset in part by the inclusion of the recent acquisition of AutoAnything. Gross margins are similar across both the 16-week and 17-week period. In regards to inflation, we've seen a modest decrease in cost year-over-year. This is different than in past years. At this point, our assumption is we'll experience subdued producer pricing headwind -- producer pricing heading into the calendar year and, therefore, we feel costs will be predictable and manageable. We will remain cognizant of future developments regarding inflation and we'll take the appropriate adjustments should they arise. Looking forward, we continue to believe there remains opportunity for gross margin expansion within both Retail and Commercial businesses. However, we do not manage to a targeted gross margin percentage. As the growth of our Commercial business has been the steady headwind on our overall gross margin rate for a few years, we have not bothered to call out the headwind quarterly. It is an element of our business model and we understand we have to manage that headwind as the business grows. Additionally, AutoAnything has been a slight drag on the gross margins as this business model operates at a lower gross margin rate. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment. SG&A for the quarter was 31.3% of sales, lower by 29 basis points from last year's fourth quarter. The decrease in operating expenses as a percentage of sales was due in part to leverage gained on the 17th week of sales. I do want to take a moment to thank our entire team for their diligence on cost control, which has always been the key part of our corporate DNA. We continue to believe we are well positioned to manage our cost structure in response to our sales environment. EBIT or earnings before interest and taxes for the quarter was $636 million, up 13.6% over last year's fourth quarter. Our EBIT margin improved to 20.6%, or up 29 basis points versus the previous year's fourth quarter. Excluding the extra week, our EBIT was $596 million, up 6.5%. Interest expense for the quarter was $60.9 million compared with $58.1 million in Q4 a year ago. Debt outstanding at the end of the quarter was $4 billion -- $4.1 billion, or approximately $420 million more than last year's balance of $3.7 billion. Our adjusted debt level metric finished the quarter at 2.5x EBITDAR. While in any given quarter we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy and share repurchases are an important element of that strategy. For the quarter, our tax rate was approximately 35.5%, flat with last year's fourth quarter. We expect our annual rate to be closer to 37% on an ongoing basis as the deviation result is primarily driven by the resolution of discrete tax items as they arise. Net income for the quarter of $371 million was up 14.7% versus the prior year's fourth quarter. Excluding the extra week, net income was up 7.4% at $348 million. Our diluted share count of 35.6 million was down 6.9% from last year's fourth quarter. The combination of these factors drove earnings per share for the quarter to $10.42, up 23.2% over the prior year's fourth quarter. And again, excluding the extra week, EPS was $9.76 a share, up 15.4% over last year's fourth quarter. Relating to the cash flow statement for the fourth fiscal quarter, we generated $519 million of operating cash flow. Net fixed assets were up 8% versus last year. Capital expenditures for the quarter totaled $156 million and reflected the additional expenditures required to open 97 new stores this quarter, capital expenditures on existing stores, hub store remodels and work on development of new stores for upcoming quarters and information technology investments. For all of fiscal 2013, our CapEx was approximately $415 million. With the new stores opened, we finished this past quarter with 4,836 stores in 49 states, the District of Columbia and Puerto Rico; 362 stores in Mexico; and 3 in Brazil for a total store count of 5,201 stores. Depreciation totaled $71.3 million for the quarter versus last year's fourth quarter expense of $66.7 million. With our excess cash flow, we repurchased $560 million of AutoZone stock in the fourth quarter. At year end, we had $468 million remaining under our share buyback authorization. Our leverage metric was 2.5x this past quarter. Again, I want to stress, we manage through appropriate credit ratings and not any one metric. The metric we report is meant as a guide only as each rating agency has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as a percent of gross inventory finished the quarter at 116%. Next, I'd like to update you on inventory levels in total and on a per-store basis. We reported an inventory balance of $2.9 billion, up 9% versus the Q4 ending balance last year. Increased inventory reflects new store growth along with additional investments and coverage for select categories. Inventory per store was up 4.8% at $550,000 per store, reflecting our continued investments and hard parts coverage. This per-store amount was up only slightly from Q3's $547,000 per store. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 32.7%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now I'll turn it back to Bill Rhodes.

Thank you, Bill. We're pleased to report our 28th consecutive quarter of double-digit EPS growth and, for the year, to report an EPS growth rate of 18.3%, or 15.6% on a comparable 52-week basis. Our company has continued to be successful over the long run. That success is attributable to our approach of leveraging our unique and powerful culture and focusing on the needs of our customers. We focus on executing at a high level consistently, which we believe can be a competitive advantage. 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. While we study the external environment and react where appropriate, 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. Before I conclude, I want to take this opportunity to reflect on fiscal 2013. We were able to build on past accomplishments and deliver some impressive results. In recognition of the dedication, passion and commitment of our AutoZoners, we grew both our Retail and Commercial businesses this past year. With this growth, we were able to achieve and surpass the $9 billion annual sales milestone. We opened our first stores in Brazil. While in early stages of development, we couldn't be more excited about our opportunities in this highly populated country with lots of our kind of vehicles. Third, we acquired AutoAnything in December of last year, providing us access to a second arguably best-in-class dot-com brand. Culturally, the 2 companies couldn't be a better fit. We look forward to learning from and growing our businesses together. Both our inventory assortment testing and hub store remodels continue at an accelerated rate, and their benefit to the sales continue. We are talking more than ever about innovation. As the industry leader, it is imperative that we stay ahead, making sure every aspect of our offerings is improved, from inventory assortments to our Commercial offerings, to leveraging the power of information technology enhancements. We can leave no stone unturned. At the end of the day, our customers have choices and we must innovate to ensure that they turn to us for their vehicle needs. Again, we are very excited about our initiatives around inventory assortment, hub stores, Commercial growth, Mexico, ALLDATA, E-Commerce and Brazil. Our long-term model is to grow new store square footage at a low single-digit growth rate and we expect to continue growing our Commercial business at an accelerated rate. Therefore, we look to routinely grow EBIT dollars in the mid-single-digit range or better in times of strength. And we leverage our very strong and predictable cash flow to repurchase shares, enhancing our earnings per share growth in the double digits. We feel the track we are on will allow us to continue winning for the long run. We believe our steady consistent strategy is correct. It is the attention to details and consistent execution that will matter. Our belief of solid consistent strategy combined with superior execution is a formula for success. 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. We are pleased, quite pleased, with our EPS growth and our return on invested capital for Q4 and we remain committed to delivering on our strategic and financial objectives. I can't wait to get back to our terrific leadership team this morning at our national sales meeting. This team is comprised of exceptional leaders. I can't thank them enough for all they do for our entire organization. We are launching our Creating Customers for Life theme and I know these leaders, combined with our talented team of more than 70,000-plus AutoZoners, will do just that. Now we'd like to open up the call for questions.

[Operator Instructions] The first question today is from Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Bill, looks like your Commercial sales per program, adjusting for the extra week, declined slightly in the year just ended. In the past, you've noted that AutoZone may be suffering from some diminishing returns in the new programs. It sounds like now there is an epiphany that perhaps the problem was more inventory coverage. Do you think the issue is that hubs are not as competitive as full line distribution centers operated by your competitors? Or are you indicating the problem is just the breadth of assortment in the hubs is the challenge?

Let me just start by talking a little bit about -- Dan, I would say that we're happy with the productivity of the commercial programs, particularly the new programs. I think -- also, keep in mind that, as we mentioned, we've got -- probably almost 30% of our programs are 3 years old or less and we've opened close to 800 programs in just the last 2 years. So just given an overall maturation curve, you're going to see a little bit of depression on the productivity of the commercial programs taken as a whole. So I would say that we continue to be pretty pleased with the progress of the commercial programs overall. And I think from a hub perspective, we view that more as an evolution. When we added more inventory into those hubs, we recognized that, that was an opportunity and so this continues to evolve. We think there are real opportunities for us to add more inventory into the marketplace, continue to expand our coverage. As we've talked about in the past, we learned that as we added inventory for -- to help support the Commercial business by adding later model coverage, we found that, that actually helped the DIY business as well. And so we think there's better and more opportunity for us to leverage the existing infrastructure that we have out there at a higher rate than we have up to this point. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: And you'd noted that the inventory per store is up a little more than 4% year-over-year, but that's about the same rate of growth in the prior quarter. Once you lay in these new inventory initiatives, how do you see that inventory per store rate increasing? And does that come at the expense of the amount of the share buybacks as you invest that cash in inventory instead of buybacks?

Yes. And always keep in mind, our first priority is to be -- to driving EBIT and to drive return on invested capital. And so we will do what is financially viable. But to cut to your real -- answer to your real question is, yes, we anticipate that inventory on a per-store basis is going to increase likely over the next year or 2 as we continue to test more opportunities for us to increase inventory coverage in the marketplace. But again, as you know, our DNA is more of a test and then roll out where it's financially viable. So our expectation is that, yes, inventory on a per-store basis will continue to increase slightly over the next year or so and we'll just continue to manage that. Obviously, we hope that, that's going to continue to drive EBIT dollars or we wouldn't be doing it.

The next question is from Alan Rifkin with Barclays.

A question for Bill. Bill, with the increased emphasis on adding inventory and hard parts in particular, how should we be thinking about the long-term effects on gross margin, given the fact that this category is, typically, above the corporate average?

Yes, Alan. I'm not sure which Bill. Bill Rhodes will take this one at the start. If you want to hear from Giles, just ask for it. I think, generally, the gross margin differences between hard parts and sales for our categories, generally, are not that significantly different. So I think you won't see any material change in our gross margin rate as a result of being more aggressive in hard parts coverage.

Okay. A question for Bill Giles. What was the effect of deflation on comps, if any?

We haven't really quantified that overall, so I'd be guessing a little bit. But it was certainly probably over 1 point or so over the last couple of quarters. We really saw a fair amount of inflation through fiscal year '12, probably '11 and '12, which kind of helps quite a bit from a comp store sales comparison, if you will. But for fiscal year '13, we've begun to anniversary some pretty good increases in inflation and we're just not seeing that right now. And frankly, we're not seeing that on the horizon either. So we will be up against easier compares, but we will not necessarily have a tailwind on that. So I'd be guessing, Alan, but I'd give it probably that rough estimate.

And one more, if I may. In an effort to just try to quantify what the effect has been on your revenues of expanding the hubs, really looking at the 92 expanding hubs versus the 60-some-odd that are not, are the comps for the expense supported by the stores -- excuse me, are the comps for the stores supported by the expanded hubs significantly greater than the comps for the stores for the hubs that you have not yet expanded?

Yes. I would say they are definitely greater. Definition of significant, I'm not sure I would go there. But as you know, we would forecast what our expectations are for each one of those, both what the hub store, itself, is going to do, plus all the satellites that are attached to that hub store. And as we rolled all through those 92 stores, it has been remarkably close to what our expectation was. So we're quite pleased with them. And yes, they're performing better. And as we get the rest of them up, we anticipate that they'll perform better as well.

The next question is from Simeon Gutman with Credit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: Can we elaborate a little bit or dig in on some of the initiatives that we talked about? I know hard parts is one of them. Then the test that was mentioned, is that separate and exclusive from the greater assortment? And is that test Commercial-focused or DIY-focused? I think you also mentioned Z-net enhancements. And any other current initiatives that are on plan for next year?

Yes, Simeon. We went into some discussions about what we're doing on the inventory assortment front. We did some pretty significant strategic assessments back last winter and end of this spring. And as a result of that, we found some opportunities where we could -- where we believe we could significantly enhance our productivity. So starting in about May, we launched a variety of tests. Some of them are competing tests, but one of them is the mega hub or expanding our hubs even greater than we are today. One of them is what I talked about, a test where we took a large group of stores and used our latest and greatest thinking on the data and leveraging the data for inventory store-level assortments at every individual store. That test proved to work very well and so we are beginning to roll that one even as we speak. It will take about a year for -- because we're going to roll it off with category reviews. It will take about a year for it to get out there. But the vast majority of it should happen between now and February. So we're just trying a lot of different things. We're very excited. Some of them are going to work; some of them aren't going to work. As I mentioned, some of them are competing against each other. So we'll see what happens. It's a little too early to tell yet, but we're confident we found some opportunities to further enhance. The other part that you asked about was Z-net. As we mentioned, about a year ago, we added leveraging information technology as one of our key priorities. And our information technology team has gone to work really collaboratively, particularly with our store operations team, and we're very excited about what we're doing. We're just now, this week, introducing this new version of Z-net to our leaders at the national sales meeting and they are very excited about what they see. So we're excited about what we have in front of us. Simeon Gutman - Crédit Suisse AG, Research Division: And just to follow up to something that Alan asked a second ago and I think this is implied in your comments but just wanted to make sure. The inventory that's been added to some of the hubs, or the expand that's been happening over the last year, that's what's increasing the productivity, meaning those SKUs are the ones that are increasing the productivity of those stores where you've added it?

I would say the vast majority -- well, I would say the majority of the benefit is coming from those SKUs, but there's also a market basket effect. So if we have the radiator, we also get some of the ancillary parts that were already there that go with that radiator, if that makes sense. Simeon Gutman - Crédit Suisse AG, Research Division: Yes, it does. And then one more bigger picture. If you look at the Commercial opportunity, we see and we hear the trade data of how fragmented the industry looks. But looking closer to your markets and I guess AutoZone is in almost every market, but looking at it on a more detailed level, can you give us a sense of the competition there? Are there these wholesale distributors that are still part of that fragmentation? Or are you budding up against the bigger, the larger players, the publics as well as the NAPAs and the CARQUEST?

Now we are absolutely competing against a wide variety of competitors, from WDs to local jobbers to individual-owned stores to the people that are public that we always talk about.

Yes. Keep in mind also, Simeon, we've got about a 3% market share. So we're in control of our own destiny.

The next question is from Matthew Fassler with Goldman Sachs.

Three quick ones, I think. First of all, if you could go into a little more detail as to the enhancements to Z-net, are they graphics? Is it reference information? Is it sort of next steps for associates to take with consumers? Because Z-net, obviously, when hit, will certainly -- gave you guys a different form factor and such. And I know some of your competitors have also enhanced their POS and their direct assistance. So can you tell us what you're doing here that you think will move the needle?

I would say that on that, it's probably more reference, just to use your own terminology. I think that we're providing better information for the AutoZoners to provide better service on completing a job, maybe to your point on what the next steps are, et cetera. But for us, it's all about making sure that the customer gets exactly what they need to do the job right. And we believe that we're adding some enhancements, particularly for individual jobs, that will allow the AutoZoners to make sure that happens.

Any sense from your early tests of the kind of impact that, that can have where you introduced it?

I would say it's really early. We tested it very lightly because it's more of a technology. It wasn't a significant investment. And then we're going to roll it out relatively quickly. So we'll see. It can only be a plus.

Got it. Second quick question. You talked about, in addition to inventory, talked about a couple of operating initiatives. How should we think about the costs of those initiatives? Are they incremental? Will they show up in any way? Or have they basically been absorbed already?

I wouldn't say they've been absorbed because we haven't rolled out everything overall. So there's going to be some elements of it that are going to be relatively low cost, where we're going to be able to leverage our existing infrastructure at a pretty high level. There may be some increased operational costs as we move some inventory. That would probably show up maybe in SG&A. But I don't think that right now, today, we're indicating that we're going to see material cost increases. And we know we certainly would be well out in front of that with you guys if we saw that. But today, we don't see that.

Got it. And then finally, I know you said that the addition of dot-com to your same-store sales calculation was not a big deal. Any sense as to the rough order of magnitude of the contribution?

I'd say it's, like, around 10 basis points maybe? So it's not...

So truly material?

Yes.

The next question is from Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: Just a follow-up on some of the inventory questions and talk about expanding the coverage. Are you looking at branded coverage to meet the Commercial hard parts demand, as well, or are we looking at keeping the percentage weighting in Duralast fairly constant?

Yes. I would say we're planning to keep the percentage weighting in Duralast very constant. This is about expanding our ability to say, yes, not adding choice. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And I guess as 71% of the stores now have commercial and you look at the store base, maybe some of them don't really apply to commercial. What do you think the potential maximum percentage is if the footprint were to stay the way it is today?

I think if you had 5 of us in a room, we'd all have 5 different points of view. We don't know the answer to that yet. We believe it's not 100%. We believe it's significantly above where it is today. Whether that's 80%, 85% or 90%, I don't think we know the answer. And frankly, as we continue to improve our offering, we think it will be higher and higher. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And I guess one last question. I mean, just from a housekeeping standpoint, what percentage of the mix would be done in the Duralast brand basket now?

That's probably around 50%.

The next question is from Michael Lasser with UBS.

I believe Bill Rhodes made a comment that you want to say, "yes," more frequently in an economically prudent manner. It seemed like that's going to be more relevant on -- or a little more relevant on the Commercial side. And perhaps to be very relevant in that market, you would have to accept lower turns, may require a greater distribution capacity, a deeper inventory investment. So how do you balance the desire to want to be more relevant in that market with your current return profile that's, obviously, very nice?

Yes, I think it's a great question, Michael. And I would start with, yes, we have 32.7% return on invested capital. We do not hold incremental investments to that 32.7%. If we have something that will exceed our 15% internal rate of return, we're going to go for it. So that's why we're going with all these tests. We also don't want to go out there and launch something big until we understand the ramifications of it. So that's why we've put these myriad of tests out there and we have great testing methodologies where we can look at tests versus control; look at the cost; look at any capital, if there is any; and then determine: is this the right investment for us over the long term or is it not? So I think our approach works really well. And it's the same approach we use to develop the current Commercial model and the same approach we use to develop the hub store model.

So if you are seeing evidence from your tests that you may need to push further on your distribution capacity, that's something that you would not rule out?

I wouldn't rule out anything. If we can find something that's economically viable and have a high degree of confidence that it's going to work over the long term, we would look at this -- all kinds of different strategies. I want to be very careful, that does not mean that's what we're going to go do. We have a myriad of tests that are out there, where we're looking at how do we improve but also make sure that it's prudent from a financial point of view.

That makes sense. My last question is on the DIY side. Can you talk about how you thought your share, your market share trended during the most recent quarter? And what were some of the puts and takes on your ability to either gain or perhaps the circumstances which you lost a little share?

Yes. I would say we probably had a minimal loss on market share overall, probably over the past year or so. And I think that, that's regained a fair amount of energy and focus in the organization. We're really excited about the things that we've put together as we kind of head forward into next year. So I don't know what the puts and calls are necessarily. There's a lot of things that we know that we can do better on internally and we think the things we articulated today are what we're going to focus on to regain market share.

The next question is from Greg Melich with ISI.

I only have 2 questions. One is, so I think you mentioned a strong traffic trend or an improving traffic trend while still negative. Could you give us a little more on that? Was that talking through the quarter or sequentially versus last quarter?

I would say through the quarter versus last year overall. And I would say that what we saw was that traffic had a little bit of an improvement from a trends perspective. And so, actually, tickets been a little bit more of a challenge and we talked about that a little bit earlier relative to the inflation factor.

So it'd be fair to say if your costs improved 110 basis points, sequentially, the traffic improved more than that?

Yes. That's a good way to look at it.

Okay. And then second is the AP inventory getting all the way to 116%. Is that a function of the new SKUs you're adding and how they turn in their terms? Or is that just sort of a timing of when the year ended? Or can we actually use that kind of rate going forward?

I would look at it from the standpoint, I think it's a lot of great work from the merchandising organization in order to balance out terms in some of the inventory that they're adding. Relative to going forward, I think we'll continue to see a little bit of pressure on that number as we add inventory over time. So we're thrilled we're at 116%. We think that's a real -- certainly an industry-leading number for us. We're proud of that number. But we're not trying to chase that number at the risk of not having the appropriate inventory coverage.

So put another way, as we add the inventory for the hubs, we shouldn't assume that the payable terms is going to cover all that investment?

I would say that's probably right over time. But in the short term, it definitely will.

The next question is from Brian Nagel with Oppenheimer. Brian W. Nagel - Oppenheimer & Co. Inc., Research Division: Just one question, I guess really for Bill Giles. Looking at the gross margins and you made some -- made comments about -- in your prepared comments about the gross margin, but just maybe so I can understand better. If you look at the trajectory through the course of the year, and it seemed like your gross margin gains moderated pretty meaningfully towards the end of the year, recognizing you don't manage towards the rate, just help me understand the kind of puts and takes with that, what basically caused that moderation?

I think that the moderation, I would attribute it more to the prior year activity than the current year activity. I think we've had pretty good improvement on lower acquisition costs, et cetera. I suspect that we had a slightly higher rate of lower acquisition costs, coupled with probably some increase in inflation and, ultimately, will always help margin a little bit. And those things didn't anniversary themselves this year. So I think, overall, when I looked at it, we're flat for last year. x AutoAnything, we're probably up maybe 40 basis points or so. So we still have a very strong margin and a growing margin.

The other element of that, we mentioned many times, is as we continue to grow the Commercial business, it is a natural headwind for us. And we're growing at an accelerated rate versus our DIY business. That is a pretty significant headwind in gross margin.

The next question is from Christopher Horvers with JPMC. Christopher Horvers - JP Morgan Chase & Co, Research Division: Wanted to follow up on the gross margin question. So as you think about inflation going forward, with a lack of inflation going forward and presumably some deflation, is it in categories where the pricing is sticky, where, perhaps, you could see some tailwind related to that, particularly as it interacts with the LIFO calculation? Or does the, I guess, modest deflation put pressure going forward on the gross margin?

I would say that at the moment, we're not believing that we'll have significant inflation or deflation, per se. I don't think that we're going to necessarily have significant deflation. So and when you think about it, a lot of this inflation occurred in fiscal year '11 and '12. '13 didn't really have a lot. If there really isn't a lot of inflation or deflation in fiscal year '14, then it should be -- not have a significant comparable impact. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. So then I guess once you get past the anniversary AutoAnything, December 19 or so, so really, some of the pressure on gross margin goes away. So we could see some modest gross margin expansion once you fully lap AutoAnything?

I think that's a fair way to look at it. That's exactly right. That would be one aspect, a pressure point that would become anniversary-ed when we lap it. And like Bill said, as we continue to grow Commercial, that creates a little bit of headwind. And then we always have opportunities to improve sourcing, so that can be a tailwind. Christopher Horvers - JP Morgan Chase & Co, Research Division: Yes. And then the last question on sales. You mentioned the Northeast was a stronger performer relative to other regions. Was that region hit particularly around the cooling weather to suggest that, that region also decelerated into August? And then is there a lingering impact overall in the business as you get past the AC season? Doesn't the mix suggest that maybe things got a little bit better here in September? Or is there a lingering impact on batteries? How do you think about that overall?

Yes. I think the reason we wanted to call out the Northeast and the Midwest in particular was that they had been performing so significantly different than the rest of the country for the last 15 months or so. Basically, what we're saying is, we said all along that we thought that was related to the winter of 2011, 2012. That seems to have been right. Now the Northeast performed pretty well this quarter. The Midwest continued to be challenged but not nearly at the rate that it was before. So I wouldn't read too much into that. As far as the batteries and air-conditioning sales, yes, those were a little bit more challenged, particularly in the Eastern United States during the summer months. They'll become less and less important as we move into October. But then we'll get into December where batteries and other failure-related categories will be very important. Christopher Horvers - JP Morgan Chase & Co, Research Division: So would you assess the August being a little slower than the start of the quarter, mainly around the weather in those categories?

It was modestly slower and it was certainly mild. So I think that's a good conclusion. Okay. 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. Our culture remains our key point of differentiation from our competition and we must not lose sight of the importance of basic store execution in order to remain very successful. We have a solid plan 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 incredibly successful. We thank you for participating in today's call.

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