Good morning and welcome to the AutoZone conference call. Your lines have been placed on listen-only until the question-and-answer session of the conference. Please be advised that 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 10:00 A.M. Central Time, 11:00 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 press release 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 perceptions 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, 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, construction delays, access to available and feasible financing, the compromising of the confidentiality, availability or integrity of information, including cyber security attacks 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 this annual report on Form 10-K for the year ended August 29, 2015 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 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.

Now I will turn the meeting over to your host, Mr. Bill Rhodes. Sir, you may begin.

Good morning and thank you for joining us today for AutoZone's 2016 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 have 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 solid quarter and year. 2016 was a very busy and productive year for us. We continued growing our business on many fronts. Our U.S. retail business expanded again in 2016 with the opening of another 156 new stores. Our commercial business continues to gain traction growing sales 7.1% for the year with 249 net new programs opened. We now have the commercial program in 83% of our domestic stores having opened 969 net new programs in just the past three years and we continue to expand our presence in Mexico. This quarter we celebrated the opening of our 483rd store. We didn't open any additional stores in Brazil this quarter and opened one for the year ending the year with eight stores in operation. Lastly, we opened six new IMC branches during the year with one opening in the fourth quarter. We continue to see significant opportunities to open new stores and commercial programs in all of the geographies where we operate. We currently have approximately 90% of our total company sales coming from our domestic AutoZone stores. While the domestic business dominates our sales mix and continues to be our primary focus,…

Thanks Bill and good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our retail, commercial and international results. For the quarter, total auto parts sales which include the domestic retail and commercial businesses, our Mexico and Brazil stores and our 26 IMC branches, increased 3.3%. Let me touch on domestic macro trends for a second. During the quarter, nationally unleaded gas prices started out at $2.22 a gallon and ended the quarter at $2.24 a gallon, a $0.02 increase. Now, last year gas prices decreased $0.18 per gallon during the fourth quarter, starting at $2.69 and ending at $2.51 a gallon. We continue to believe gas prices have a real impact on our customers' ability to maintain their vehicles and as cost reductions help all Americans, we hope to continue to benefit from this increase in disposable income. We also recognize the impact of miles driven on cars over 10 years old, the current average is much different than on newer cars in terms of wear and tear. Miles driven increased 2% in May and 3.2% in June and we don't have July or August data yet. But year-to-date through June, miles driven were up 3.3% and ahead of last year's increase at this time. The other statistic we highlight is the number of seven year and older vehicles on the road, which continues to trend in our industry's favor. For the trailing 52 weeks ended, total sales per AutoZone store were $1,773,000. Now for the quarter, total commercial sales increased 5.2%. In the fourth quarter, commercial represented 19% of our total sales and grew $32 million over last year's Q4. This past quarter, we opened 116 net new programs versus 134 programs opened in our fourth quarter of last fiscal…

Thank you Bill. We are pleased to report our 40th consecutive quarter of double-digit EPS growth and for the year to report an EPS growth rate of 13%. We are also quite pleased with all we accomplished during 2016. While we experienced more regional sales differences than either planned or usual, our company executed exceptionally 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 have to consistently adhere to living the pledge. We cannot and will not take our eye off of execution. We must stay committed to executing day-in and day-out on our game plan. Success will be achieved with an attention to detail and exceptional execution. Before I conclude, I want to take this opportunity to reflect on fiscal 2016. We were able to build on past accomplishments and deliver some impressive results. In recognition of the dedication, passion and commitment of our AutoZoners, I want to highlight that we grew sales to a record $10.6 billion this past year and we grew same-store sales at 2.4% and we continued with our double-digit EPS growth streak, reaching our 40th consecutive quarter. We grew our store base in Mexico and managed our expenses exceptionally well in spite of the foreign currency headwind with the peso. We continued with our IMC integration, opened six new branches and now have 26 in total. Our inventory availability rollouts continued on plan. I could not be more proud of the tremendous work everyone on these projects contributed. And lastly, we are talking more, more about saying Yes! We've Got It to our customers. We are determined to meet all our customers'…

[Operator Instructions]. Our first question will be from Mr. Alan Rifkin of BTIG. Your line is now open.

Thank you very much. My first question has to do with commercial. As you continue to expand the MFT program as well as the hubs and the mega hubs and I realize that certainly you are earlier in the program on some versus others, but as you assess the expenses associated with each of these initiatives and the potential benefits, how would you rank order where between the three of these initiatives you think can be most profitable to you down the road?

Help me with the three. Are you talking about multiple frequency of deliveries, mega hubs and what was the third one, Alan?

And hub stores, Bill.

And hub stores. Yes, I would say hub stores are pretty much baked in the cake at this point in time. We will open a few more. They have been a great addition to our strategy and we will continue to leverage them long-term, always looking for more opportunities to leverage them further. As I said in our prepared remarks, the mega hubs continue to outperform our expectations. They are doing really, really well. We have got 11 of them now. We will hopefully open more than a handful this year and are proceeding very well with that. That one is much easier to measure and qualify the results. Multiple frequency of delivery, because you are talking about the randomness of demand, it's a little bit harder to evaluate that. In our test store, we feel very good about it. We are just trying to go back now and validate it. But I would say, the mega hubs are out performing at this point in time and we are continuing to try to refine both multiple frequency of delivery and mega hubs.

Okay. Thank you. And my follow-up, if I may, it was mentioned during the call that the trends accelerated elevated as the quarter ended. I was wondering if maybe you could provide a little bit of color on the performance within the quarter of the weather impacted versus non-weather impacted markets or discretionary versus non-discretionary items, just to give a little bit more clarity around what drove the comp? Thanks.

Yes. Clearly the quarter started softer than it ended. I don't want to overstate that. These were modest improvements that kind of built throughout the quarter. As you know, it got much hotter around July 1. And as we said on the last call, heat's going to help us in the summertime and it certainly did. We saw those benefits across the board in those in heat-related categories. And yes, we saw the weather impacted regions improve modestly, but I think as we have said before, we think that it's going to have a lingering effect until we get into a more normalized winter.

Okay. Thank you very much.

All right. Thank you Alan.

Thank you. Our next question will be from Mr. Seth Sigman of Credit Suisse. Your line is now open.

Thanks. Good morning guys. Just a follow-up on that last question. So is it fair to assume that the gap between the stronger and weaker markets has continued to narrow here in the first quarter, even if just modestly?

Yes. We have got kind of a standing practice. We announce our earnings so early in the quarter that we really don't want to get into this quarter's results. We are three weeks in and things can't just happen in three week periods. So I don't ever want to talk about what's happened in the current quarter. I am sorry.

Understood. Maybe I will just ask it a different way. So is it your sense that the gap has really just been weather? Or could there be something else going on, either from a consumer perspective or a competitive perspective? And I guess on the consumer side, I think some of the regions that you have highlighted have also been highlighted by some other companies, even in different sectors. So just wondering your thoughts on that.

Yes. For us, I don't think the health of the consumer is really that significant of a driver. If you turn back the clock to 2009, 2010 and 2011 when everybody was really struggling, we performed exceptionally well. So I don't think we are a good barometer of the consumer and the consumer's health. I think the biggest differentiator for us has been the weather that happened in those parts of the country. We saw it back in 2012. We have gone back and studied it now. That's why we are saying we think the effects will linger until we get into a good, strong winter again.

Okay. Thanks for that. And then just my follow-up question is on the online business. So you have mentioned a couple of times on the call. Can you talk a little bit about the expanded offerings that you mentioned and also some of the investments that you alluded to? And I guess ultimately do you expect to be spending more on online as we look out over the next year versus what we just saw? Thanks.

Yes. I think that we will continue to spend a little bit more on our eCommerce platforms, particularly on autozone.com. Because although our volumes may not be a significant from an eCommerce perspective, we have a lot of eyeballs coming to our site to learn more about our products or availability, maybe even get some repair information, et cetera. And we believe that that traffic migrates itself to the stores and winds up resulting in a purchase. So from an omnichannel perspective, our eCommerce platform is very important relative to providing a complete WOW! Customer Experience for our customers in terms of learning about the products, understanding the location of the stores, pricing, et cetera and then transferring that to the stores and then executing the transaction. We also make it easy for our customers to do buy online and pick up at store. So we are trying to be able to provide great service to the customers in any form that they want to be able to shop in. And so we think eCommerce is an important element of that and we will continue to invest in it.

Okay. Thank you.

Thank you. Next question will be from Mr. Michael Lasser of UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Presumably, given your comp in the quarter, you are not seeing the $1,000 to $1,500 of incremental sales from all the initiatives you have put in place. So why do you think you are not seeing that as you expand the availability of those initiatives?

I am not sure that I am prepared to say that we are not seeing it or whether or not there's something else. As I mentioned, there was a 400 basis point impact in the comp. One of the things is, a lot of the multiple frequency of delivery work has been done in those weather impacted regions. So maybe it would have been more pronounced without it. What we are saying is, look, we hear you loud and clear. We don't see it showing up in the 1% comp, but it might be something else. We are going back to the drawing board and reassessing everything we can to make sure that we optimize those resources. At the end of the day, we know we are improving customer service and we know our in-stocks are up materially. That has to ultimately help our business.

And Bill, on the whole online discussion, can you give us a sense of what your customer base on the DIY side breaks down between heavy DIYers and more casual DIYers? And how much of a sale is the nature of each transaction involved so we can kind of scope out what the potential risk is if this category doesn't go online?

I think that from an online perspective, we are seeing that mostly in somewhat nondiscretionary purchases as far as traffic is concerned and where it's going, et cetera. But I think also the way we think about online a little bit is there will always be an element of transactions that are going to occur online. But from our perspective, we provide trustworthy advice at the counter for the customer. We also provide an ability for us maybe to replace wiper blades or install batteries, et cetera. So there's a service element that takes place at the store as well. So there's a value proposition that takes place in the store that's different than anything you are going to receive online. You have got somebody you can talk to you, get repair information that can be printed out and provided to you, get somebody who can walk out to your car and look at it and help you assess what it is you want to accomplish. So in addition to that, there's cores attached to many of the products that we sell which create a two-way transaction. So there's all sorts of elements that from our perspective, we provide a great value proposition. And I know that there is a discrepancy in the pricing that you are going to see online versus what you get in the stores and that's all part of the equation. So we think from a long-term perspective that we are cognizant of those price discrepancies, but we will also make sure that we continue to add a value proposition that's warranted.

Maybe I can just ask the question differently. What percentage of your DIY sales come from customers who spend more than $500 a year with you?

It would be exceptionally low.

Okay. Thank you so much.

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

Good morning guys. First question on the commercial sales program. Bill, you mentioned you are looking backwards or looking at all options, trying to figure out how to optimize it. What's your sense on the investments that you are making, the ones that are in place, are these things that will take time to get more traction? Or do you think that somehow you have to put more money or put more dollars or CapEx or more SG&A into it to drive the commercial growth?

Yes. I think it's something that has to mature over time. These are relationships built with customers over long periods of time. And because you enhance your availability either from in-stock position or from an expanded parts assortment, they are not necessarily going to switch to you over time. Particularly on the expanded parts assortment, when they are calling around and they find that you do have that product, that's going to help you move up that call list, but it's not going to happen overnight.

Okay. And then I guess maybe for Bill Giles, when you initially talked about the rollout of more frequent delivery, right? We dimensionalized the cost. I think it was 20, 30 basis points or so a year. I am not sure that included the rollout of DCs. And so next year, we talked about the DC starting to come into the picture. Does that mean the EBIT margin starts to get inhibited? I know you reiterated the earnings growth algorithm and it sounds pretty typical, but I am curious what happens at the line with margin. Could we see margins flat or if not, maybe down in this investment scenario?

I think that the MFT, like we said, was like you articulated, was 20 to 25 basis point impact on gross margin. When we roll out the distribution centers, just by the geographic nature of where they get rolled out, our anticipation is that some of the transportation cost savings will wind up offsetting a big chunk of that. So there may be a little bit of deleverage from the start-up perspective, but on an ongoing perspective, we would not expect the new distribution centers to really deleverage gross margin in any meaningful way.

Okay. Thanks.

Thank you. Our next question will be from with Ms. Kate McShane of Citigroup. Your line is open.

Thank you for taking my question. A couple of questions on commercial also from me. You had mentioned that commercial had been growing the low to mid single-digit range for the industry. Can you tell us how much you think the industry grew this year? And then second to that can you walk us through how you think about the maturation of programs weighing on your comp versus the market share gains you mentioned for commercial?

Let me get into the first one. We don't have the exact numbers of what happened in the commercial industry. From what we have seen, from watching our competitors and some of our public customers and what we have seen, we think it probably slowed 200 to 400 basis points year-over-year. That's not a very finite number, but we have certainly seen virtually everybody show a deceleration in their growth, particularly in the second half of our year. And I am sorry, what was the second part of your question?

You quantified some of the impact from weather, but I just was more curious about any kind of magnitude with regards to your commentary around the maturation of programs, which I know you have mentioned before, versus the market share gains you think you gained in commercial during the year.

Yes. The deceleration of our program growth and it wasn't just this year, it's really what's happened over the last three or four years, if we qualify that, it's about 300 basis points of the deceleration in our commercial growth.

Okay. Great. And just kind of a nuanced question, but I am curious why the mild winter can still impact your business before the actual winter hit? Is there still repairs from a severe winter happening in the months of June and July? And how much of that is the percentage of your business during those months?

Yes. It absolutely impacts it going forward and we can go and look at specific markets and see it crystal clear in their performance in certain categories. One of the things that happens in the wintertime in those regions is the snow and ice. Either we have to put salt down to take care of it or there's snow piles that are tearing up the roads. That puts pressure on the under-car parts. Think about chassis and the like. And also the salt makes things rust. And so they don't just rust that day. They rust over time and those rusted parts have to be replaced over time. So we are very confident that we understand what the weather implications are and we are also very confident that they kind of last until we get to another big winter cycle.

Thank you.

Yes.

Thank you. Our next question will be from Mr. Chris Bottiglieri of Wolfe Research. Your line is open.

Hi. Great. Thanks for taking my question. First one I had was, it seems like you are hedging a little bit and I could be wrong here, but it seems in terms of the daily deliveries and if it ultimately will work. I am trying to understand in that core 20,000 SKUs, realistically how many of those need to be replaced more than once a week? Is there some kind of other median between the mega hub and the DCs that you could do to maybe service those SKUs? Then lastly, if you decide that mega hubs is a solution and daily delivery more than once or 2x a week isn't a solution, would you consider expanding the rollout of those mega hubs?

We are going as fast as we can go on the mega hubs. Nothing is holding us back, not capital, not operating expenses. We want to go as fast as we can go. The challenge of that is the real estate projects. And real estate projects can easily take two years from the time you initiate until the time you are completed. These are even more complex than our regular projects. So I don't think it would have any bearing on where we are with the mega hub rollout. But what I would characterize multiple frequency of delivery is yes, we are trying to find the benefits in the numbers and it's a little bit more difficult than we would like. We knew that going in. It was more difficult in the test as well. We also are looking at it at a more granular level and are trying to find some opportunities and are seeing some interesting things where we might have had some unintended consequences that we can reverse and improve on. So all we are saying is, we get it that it's hard to say. We have seen $1,000 to $1,500 per store and a 1% comp. That's not lost on us and we are going back to work to make sure we can find it.

Okay. That's great. And then just one related follow-up. Could you talk about the key drivers across the industry right now to the best you are able to? Are like-for-like SKUs still deflationary? What about part complexity? How much do you think it's adding to average selling prices? Maybe attempt to quantify that?

Yes. I think on the parts complexity, there's probably a natural inflation, right, that occurs from a technology perspective that we have seen over time and continue to see. So that helps us a little bit from inflationary perspective. On commodity or a cost basis, we have seen very little inflation. In fact, in some cases, deflation. So from that perspective, on an average transaction value, we would say that we have seen little benefit and possibly a slight deterioration from commodity based prices. And then that's been offset by some enhancements or increase, if you will, from technology inflation that always exist. So actually when you think about it over the last three years, our comp store sales, same with the industry, has probably not been helped by inflation. Inflation usually can be a help in terms of same-store sales and that just hasn't existed over the last couple of years.

Got you. Okay. It makes a lot of sense. Thanks again for your time. I appreciate it.

Thank you. Next question will be from Mr. Seth Basham of Wedbush. Sir, you may begin.

Thanks a lot and good morning.

Good morning.

Good morning.

My question is around the lift you guys have gotten from the two initiatives, frequency of delivery and mega hubs. Of the $1,000 to $1,500 per week lift that you are experiencing, how much can you attribute to frequency of delivery versus mega hubs?

Yes. We really haven't quantified it because it's so hard to quantify it. But a little bit more than half, I would believe, from the multiple frequency of deliveries and the balance from mega hubs on a per store basis when it's rolled out.

Got it. That's helpful. Okay. And then secondly, I was just hoping you give us a little bit more perspective on the comp trend through the quarter. Not to beat a dead horse here, but as you think about the weakness earlier in the quarter and the strength at the end, was August in fact stronger from a comp trend perspective than July?

Yes.

Great. Thank you very much.

All right. Thank you Seth.

Thank you. Next question will be from Mr. Matt Fassler of Goldman Sachs. Your line is open.

Thanks a lot and good morning to you. I want to follow-up on a couple of comments you made online. First of all, I realize that online is less than 5% of your business, but can you give us a sense of the growth rate that you have experienced there, I guess particularly within AutoZone as you can think about it kind of on a full year basis?

I would say on AutoZone, it's going to grow at a faster rate slightly than the retail business, but you are right, Matt, it is less than a 5% business. It's growing a little bit. But our emphasis and focus on autozone.com is about providing customers with information because in more cases than not, they are executing that transaction in a store or even through a buy online, pick up in store or a visit to the store after they have visited the website. So we will continue to execute commerce on our website and we will continue to make it a better site in order to do that. But the real emphasis is creating that whole omnichannel experience for the customer between getting online, getting information and getting to the stores.

And if I can ask a follow-up on that. So you have talked about the expertise of the parts pros behind the counter and you also talked about AutoAnything. If you go to the AutoAnything site, it leads right at the top with a live chat option and really stresses the presence of phone experts. And I realize that at AutoZone, you certainly have that in the store. Are you considering bringing some of that functionality, some of those features to the AutoZone site to make the brand truly omnichannel from a knowledge perspective as well as from a logistics perspective?

Probably to some extent. But you are right about AutoAnything. One of the real competitive differentiators is the online chat and the call center and the ability to help customers through more complicated transactions. And also to back on to, I think it was Michael's question before, I mean, the average transaction value on AutoAnything is dramatically even in what we experience in the store. So keep in mind that the majority of things that we are selling are way less than $100 per unit items and so they are significantly smaller tickets.

Are you deliberately perhaps trying to position the websites differently at this point in time? Or is it a matter of time until you bring more functionality and more of that engagement opportunity to the zone site?

Yes. I think we will continue to enhance the zone site and continue to bring more and more functionality enhancements. But those two sites will always be positioned differently because one is strictly an online-only website and the other has the over 5,000 stores with 84,000 people being able to provide great customer service. So it's a different value prop.

Great. Thank you so much.

Thank you. Our last question is from Mr. Chris Horvers of JPMorgan Chase. Your line is open.

I made it in. Thanks for taking my question. 10:59, so I wasn't sure.

Congratulations or condolences?

So my question is, how do you think about the risk that sales trends decelerate from what you have seen in August and September? The hot summer is behind us. Are you seeing acceleration in non-heat affected categories? And related to that, do you think the boost from the lower gas prices last year is now getting behind us and it's a part of the outlook until we get to cold weather?

I think anytime gas prices are low, it's going to benefit us. Especially when you think about the impact of lowering gas prices on the low end consumer, that's putting more dollars in their pocket. No different than the fact that we see significant increases in our business when tax refunds happen in February and March. Whenever our customer has some money in their pocket, we seem to benefit from it fairly significantly. As for what are the trends going to be in Q1 and Q2, you know we don't really give guidance. As we look at Q1 and Q2 last year, we are comping against more difficult comparisons. We do believe that the weather implications or weather impacts are going to continue to be a bit of a headwind. But we like where we stand. We are going to continue to fight it out and do the best that we can every day.

So it sounds like getting beyond batteries and AC repair, there's got to be some sort of other parts of the business that get better to compensate for that lift that you see when you see extreme heat?

Yes. Batteries and AC heating parts are the big parts. By the way, it's still quite hot across lots of parts of the country right now. Hopefully, we will have a bit of an Indian summer and that will help us too.

And then my follow-up is, so it looks like if you look at the narrowing of the gap between what we calculate as commercial and DIY comp, it went from 600 basis points the past two years to 300 this year. So it sounds like the maturation is really the single and almost exclusive factor that drove the narrowing gap between the performance?

I think that's a good way to put it.

Okay. Thanks very much. Good luck.

Thank you.

Well before we conclude the call, I would just 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, this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful. We thank you for participating in today's call.

Thank you. That concludes today's conference call. Thank you all for participating. You may now disconnect.