Good morning and welcome to the AutoZone Conference Call. Your lines have been placed in 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 third 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 am Central Time, 11 am Eastern Time. Before Mr. Rhodes begins, the Company has requested that you listen to the following statement regarding forward-looking statements.

Certain statements contained in this presentation are forward-looking statements. The 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 up by 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 cost 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 the Annual Report on Form 10-K for the year ended August 27, 2016. 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.

Thank you. Now, I'll turn the meeting over to Mr. Bill Rhodes. You may now begin.

Good morning and thank you for joining us today for AutoZone's 2017 third quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer and IT; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release along with slides complementing our comments today, are available on our website, www.autozoneinc.com. Please click on Quarterly Earnings Calls to see them. To begin this morning, I want to thank all AutoZoners across the Company for their tremendous efforts during this past quarter. While our results for the quarter were below our expectations, the challenges seem to be broad-based across our industry and other sectors of the economy. The first few weeks of our 12-week quarter were very challenging. On our last conference call, we discussed the impact on the second quarter of the delay in income tax refunds, and that headwind continued for the first five weeks of our third quarter. Our expectations have been that much of those delayed refunds would lead to incremental store sales in Q3 but that never materialized. We don’t have any empirical evidence of where those funds went but they seem to go to some other part of the economy this year. While our March sales did improve, we saw inconsistent week to week performance. It wasn’t until April that we began to see stronger sales results. We can speak at length about delayed income tax refunds and the second consecutive mild winter but the more overarching thing for us was sluggish customer demand across virtually every category, resulting in disappointing sales performance during a specific eight-week period. As we exited the quarter, we felt our sales…

Thanks, Bill, and good morning, everyone. To start this morning, let me take a few moments to talk more specifically about 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 and Brazil stores, and our 26 IMC branches, increased 1.1%. For the trailing 52 weeks ended, total sales for AutoZone store were $1,768,000. For the quarter, total commercial sales increased 3.6% and the third quarter commercial represented 19% of our total sales and grew $17 million over last year's third quarter. This past quarter, we opened 56 net new programs versus 46 programs opened in our third quarter of last fiscal year. We now have our commercial program in 4,493 stores, or 83% of our domestic stores, supported by 184 hub stores; approximately 900 of our programs are three years old or younger. In 2017, we expect to open approximately 200 new programs. While our trends slowed during third quarter, our April and May sales were in line with our results from earlier this year, which while not meeting our aspirations, is morning encouraging in our trends in February and March. We remain focused on having a great sales team, supplement with strong engagement of our store managers and district managers. We remain confident we will continue to gain market share with our commercial customers and we’re encouraged by the initiatives that we have in place and feel we can further grow sales. And as Bill previously mentioned, while we think our strategy has worked very well over the last nine years, we want to take a first objective look over the next several months. Whether anything material change, we don’t know, but we do know, we will likely implement some tests to continue…

Thanks Bill. This quarter we reported our second consecutive quarter of challenged sales and profitability performance following 41 quarters of double-digit growth and EPS. Clearly, some of our recent challenges have been macro like timing of IRS refunds, rising wages and interest rates and peso weakness, but macro challenges and benefits come and go. We also have some areas where we need to improve our performance and that is where our attention is focused, determining the right frequency of delivery to our stores from a cost benefit perspective; figuring out why our shrink results deteriorated and correcting those efforts; reaccelerating our sales in both retail and in particular in commercials; finding new ways to leverage our most important asset, our AutoZoners in an accelerating wage environment where personal touch and trustworthy advice really matter and differentiate us. While we are disappointed our recent performance as a Company and as a team, we have been through both periods of difficulty and periods of tremendous success. Over any extended period, our Company successes have been remarkable. While we need to challenge ourselves, our decisions, processes and strategies, we also need to remember our tremendous record of success and reinforce some of our guiding principles; evolution over revolution and superior execution with consistent strategy is a winning formula. Simultaneously as we are faced with more difficult circumstances, we must step back and take a more objective view of what is working and what may not be. As we are in that stage, we see so many things that our team continues to do exceptionally well. But we also see some areas of opportunities, more areas from accelerated experimentation. After so many years of unprecedented performance, I am proud of our team for their steadfast commitment to our culture, strategy and approach and for…

Thank you. [Operator Instruction] The first question comes from the line of Mr. Alan Rifkin from BTIG. Your line is now open, sir.

Question for Bill Rhodes, starting with respect to the comps, I appreciate all the color that you have described throughout the quarter but Bill, can you segregate the impact of the tax refund versus the weather on the quarter overall? And can you also talk about the comp performance of the stores that is supported by the mega hubs versus the stores that are not? Then I have a follow-up please.

Okay. Regarding separating the comps between the weather and the tax refund, it's really difficult to do that Alan. I wish I can give you more clarity. I would like to go on little more detail on the tax refund. As we mentioned on our last call, we fully expect that those refunds have been shifted later in the cycle and we would actually see a benefit from those in Q3. For whatever reason that we don’t quite understand, those refund dollars never seem to show up. I don’t know -- if I went to say things, [ph] you hear some of that; as I go to remittances to Mexico, did they show up in other sectors in retail or other sectors of economy, we don’t know. But it does not appear that they came into our sector in any meaningful way. And we’ve watched it very closely and we have monthly reporting on market share from two different sources and both of those sources continue to show that our market share gains were very similar throughout this period of time. We just had an eight-week period, three weeks in last quarter and five weeks in this quarter, we were just significantly impacted; it was kind of like when the calendar turned in April, things went back to normal like they were in the fall and early winter. Regarding the mega hubs, we continue to see that it provides a benefit when our store get turned on to it, very significant benefit, 1% to 1.5% range when they get fully turned on to full service out of mega hubs.

And my follow-up, if I may, your decision to increase your operating expense obviously is well documented. But certainly, when you started to do that, I don’t believe you foresaw the difficulty in the environment. What is your ability and willingness going forward, if sales continue to be a little bit below your plan; what is your willingness to cut back on some of the discretionary spending and expenses [technical difficult]?

I think there are several things in that question, Alan. First of all, as we increase this investment profile, not only the sales get weaker but several of the things that have been industry tailwinds and our financials are macro tailwinds and our financials turned against this, so it was a little bit of a double whammy. As we look at it going forward, yes, we're going to change our cost structure where we can. The biggest question we’re focused on right now is, we think there is some opportunities to decrease the multiple frequency of deliveries that we’ve rolled out over the last couple of years. Unfortunately, we've not been able to quantifiably see that we're getting a sufficient benefit out of that. So, we're going to continue to test and take some of these stores down to two times a week, we can set a three times a week and hopefully make a final decision in the next six months or so on where we will be long-term. We will pull back some of those costs. What we won’t do is pulling [ph] back cost at the point we're not providing great service to our customers. We're in this for the long-term and sometimes we're going to have periods of little bit weakness and sometimes going to have great periods of strength. We’ve got to manage this business for the long-term.

Thank you. The next question comes from the line of Mr. Simeon Gutman from Morgan Stanley. Your line is now open.

Bill, you mentioned that the last seven weeks were up 2%, can you share with us if that 2% run rate was relatively uniform during the period, or volatile? And then, related to that, is the run rate that you are seeing today, because you did mention May, does that -- do you feel like it resolved the debate, whether the industry is healthy, there was just a bunch of noise? I mean how do you know there is just some pent up demand that’s being realized in the late part of last quarter and early part of this quarter?

Great questions, Simeon. When we talked about May, we were talking about May that we was still in the same part of our portal. As we think about the sales environment, what we noticed was there was a very distinct eight-week period of time where it acted very differently. Go back to the fall, September through mid-January, it was pretty consistent. Now, we have fluctuations week-to-week and you asked about in April that we see fluctuations. Of course, we do because the weather patterns in April are so different. But the expectations week to week based upon the weather that we were experiencing was more consistent with our expectations. That was not the case in that February to March period of time.

I guess looking back at the last, I don’t know, a year, it feels like the industry has become a little less consistent, maybe a little less predictable. Looking back at it, do you feel like it’s explainable by a bunch of these small things or relatively large things? And you mentioned, you are requisitioning a lot of things and some of it is strategic but on the industry as a macro, can you share with us what your requisitioning, what we should be thinking through just given some of the bumps that this industry, which is not normally used to it has experienced over the last year or so?

Yes, that’s a great question. So, as I think about the industry sales environment and when I think about AutoZone’s sales performance over the last year as compared to other years, we have come off to very, very mild winters. I have mentioned it in the prepared remarks, what we have experienced over of two year period of time in the Northeast, Midwest, and Mid-Atlantic is alarming. I don’t think that has anything to be with what's going on in those markets. I think it has to do with what's going on with the weather pattern. We can see it in specific categories that are very related to snow, ice, salt potholes, mainly under car items. So, I think very strong as that has as impacted our industry's performance. And then, this whole tax refund thing, this year, it was just a tremendous anomaly. I can't explain it; I don’t know where those dollars went but that has been such a big driver of our industry sales over the last five or six years and it just went away this year, it was non-existent. And the other thing on AutoZone’s front is our commercial sales are decelerated. They decelerated because we were doing a lot of things on opening new programs and our sales were benefiting from that. As we’ve gotten further down that maturation, we hadn’t had [ph] the same benefit from those. But we continue to gain market share in both retail and commercial. We believe the sales environment is going to continue to be pretty strong.

The next question comes from Mr. Steven Forbes with Guggenheim Securities. Your line is now open.

Given the dichotomy of the P&L impact, you mentioned right between the mega hub rollout and as compared to frequency delivery rollout both top and bottom line, if you decide to further slow down the rollout of the frequency initiative, does that free up resources to ramp in mega hub initiatives or is the bottleneck really finding real estate? Just give us some color on the urgency around that initiative, given the potential benefit and just the business restrains relating to rollout of it.

It has such a good blend, Steven. We feel really good about the mega hubs and the results that we have had. And you are spot on that there are some real estate constrains relative to our ability to open up more and more mega hubs. You will see us continue to open up mega hubs and the speed at which that we open them up will be somewhat contingent upon finding the right available real estate in order to do that from more frequent delivery standpoint. Look, we are an analytically driven company, and if we do not see the benefits from the investments that we are making, we are going to make adjustments to that. So from that perspective, yes, we believe that we will basically reduce expenses from that perspective in the future as we make adjustments to that.

And then, maybe a follow-up on the frequency of delivery rates. Have you identified which stores will revert, if so, back to the two times or one time for weak delivery? And then, maybe just touch on what parameters are going to drive that decision? I would imagine it's not simply just sales, right, given the service aspect of the business; I would imagine competition may play a role in a decision. Just maybe you could touch on some of the parameters that are going to drive that decision process?

Yes, that’s a host of those things but frankly you have hit on the right one, sales can be a big driver, distance, number of stores on a route et cetera. So there will be a number of factors there. But sales are going to be heavily weighted, because again we have adequate return on the investment dollars that we are putting forth and right now we don’t believe that we are not going to make adjustments to it.

Thank you. The next question comes from the line of Mr. Matt Fassler from Goldman Sachs. Your line is now open.

My first question relates to your thought process on the economics of some the investments that you necessarily -- you might want to pull back. What's the ROI, the financial ROI calculation that you have done to determine whether it works for you? And if you do back away, where would we see some of the investment, would it be gross margin, SG&A, CapEx et cetera?

Yes. Matt, it's not as much an ROI calculation because the capital that we are deploying to do this is not that significant. We are opening these two distribution centers, not because of multiple frequency of delivery, but because we need an incremental distribution capacity. But this is more about how are we going to -- better than a breakeven on the sales environment for the operating expense increases that we have experienced. So, the vast majority of the difference will be seen in gross margins; there will be a little bit of it in the SG&A but most of it will be in gross margins.

Is that a function of the frequency of truck runs diminishing and consequently the supply chain cost coming down?

Yes, it's predominantly supply chain; it's truck runs but it's also extra tours to the distribution centers, so labor in the DCs.

And do you feel like there is any -- I mean obviously there is a trade off, do you feel like there has been some sales benefits to you from this that would dissipate or do you feel like it hasn’t really moved the needle?

I think there has been some very minor improvements in sales which would go away, but it's not material, unfortunately. If it was, we continue to do it. And I want to be careful here. We have not made final decisions. This is a very complicated analysis to do. So, we are still doing some work over the next several months to figure out what the right frequency for us is. One of the things we are realizing is that many years ago in our hub stores, we started doing kind of feeder replenishment out of those stores to the outlined store that they service and so that’s one of the reason we are not getting the same kind of benefits out of the multiple frequency of delivery. We were already [indiscernible] highest probability SKUs that we sell; so that benefit didn’t exists for us.

And then, my second question, speaking about what changed this quarter, if we look at sales per store or kind of back into comp, DIY didn’t really decelerate, almost all of the deceleration related to commercial. How should we dimensionalize that as you think about both the macro factors you discussed related to taxes and whether -- and also to some of the changes in investment posture they have for that space? And do you agree with my read of the numbers by the way?

I agree with your read of the numbers versus last quarter but you remember, last quarter got killed at the end, particularly DIY. So, I think both businesses have been impacted during that eight-week period of time pretty significantly. And our commercial business has decelerated more than we would have expected. By the way that’s why we're going back and taken another strategic look at commercial. I'm really excited about what we're going to be doing. It’s going to take us some time but we're going to take a fresh look at what we’re doing in commercial and what are our long-term strategies there.

Thank you. The next question comes from the line of Mr. Seth Sigman from Credit Suisse. Your line is now open.

My first question is around the international performance; just wondering if you could quantify the impact from FX and also the impact from results in Mexico and how those may have underperformed.. And just as you think about the state of that business, are there adjustments that you're making or any signs of stabilization there?

I would say, the core base business continues to do well, if you just look at it on a local currency basis, the business continues to perform strong. We're very pleased with what the team has done down there et cetera; from a foreign currency exchange impact on our EPS growth rate, it is probably a little less than 1% of an impact from a growth rate prospective. So, it continues to be a bit of a headwind. So, for us, it’s really about the exchange rate; there is not a lot of strategies that we're necessary going to change. We feel pretty good about the position of Mexico, we're excited about 500th store opening as Bill mentioned earlier. So that business continues to go well but hopefully the peso will turn around a little bit in future.

And then regarding the gross margin, if you back out the supply chain impact and the shrink impact this quarter, it still says that the benefit from lower acquisition cost would be less than prior quarters. So, when you peel back to gross margin, can you just give us a sense of what some of the underlying drivers are there?

Yes. I would say actually we feel really good about what the merchandising organization has done relative to continuing to find opportunities to lower acquisition costs. We mentioned a couple of quarters ago about our activity around direct importing and we continue to increase that. So, the team has done a nice job there, continuing to increase that. So, I feel really good about the health of the gross margin rate today and going forward. It may be a little bit less but it’s still very healthy and it’s very well positioned. So, we have a couple of very identifiable expense items that are putting some headwind on gross margin, both of which we believe are just near-term headwinds and we will be able to work our way through those. But lowering acquisition costs is something that we think is there for a while.

Thank you. The next question comes from the line of Mr. Michael Lasser of UBS. Your line is now open.

Bill Rhodes, what do you think the long run rate or the comp of this business is? Is it materially different than what has been in the past, especially you're going to come up against the much easier comparison you are running at 2% comp or so right now, shouldn’t it be better than the 2% as you anniversary some of the easier trends that you saw last year?

I don’t want to get into what's going to happen as we go into individual quarter comparisons but I'll go into what your original question is. What has changed with the macro outlook for sales in this industry over the long term? I would answer that absolutely nothing. We had an eight-week period of time, which we believe we can very easily attribute to the tax refund delays and two mild winters. But I don’t see anything else in this industry that has changed really at all.

Based on that comment, do you think a 2% run rate is still a realistic long-term expectation, reasonable expectation of business, if nothing changed? [Ph]

Again, I don’t want to get into giving guidance. What I'll tell you is I think the industry performance over the long term has not changed by any significant level. And the one challenge that we have in our sales performance compared to what it's been over the last five years is that our commercial business is not growing at the same rate that it was growing before as we opened all those new programs. We have to take that on and we have to find ways to accelerate the market share gains that we are already getting in commercial. And that will be a critical element of our story over time.

And my follow-up question is you are making a lot of tweaks of your delivery, availability and frequency, and replenishment, do you think if you were to lower prices, your sales would increase?

I have been in this business for 22 years. I can't add up five times without seeing lower prices lead to higher sales.

Our next question comes from the line of Mr. Seth Basham of Wedbush Securities. Your line is now open.

My first question is just on your long-term growth algorithm, Bill. You previously stated the mid single digit EBIT growth and double digit EPS growth, is that still how you see about the business?

I think over the long term, we would -- that would be -- continue to be our goal. I did highlight, in the short-term, we have a disproportionate amount of things, some of which are decisions we have made or things we have done to ourselves and some of them are kind of a disproportionate amount of macros things that are current and are headwinds for us. I think in the intermediate term, we have some more challenges to get to those numbers. Over the long-term, particularly if we are able to reaccelerate our commercial business, that will continue to be our goals and aspirations.

And then secondly, my follow-up question is drawing inventory per store. We have seen a rise in that mix for the last couple of quarters. Are you comfortable with the levels you are at; do you expect to see some declines going forward? How should we be thinking about that and the potential impact down the road on margins and sales?

I think as we move forward, we expect that number to hang where it is little bit, maybe come down a little. You saw that came down consecutively from last quarter on a per store basis. So, inventory levels are little bit higher than we would have desired; some of that was sales related; some of that also is some of the activities that have relative to opening up mega hubs, direct import activity et cetera. So, some of that is for good reasons. But, we expect it to moderate going forward.

Thank you. Our next question comes from the line of Ms. Kate McShane from Citi Research. Your line is now open.

With regards to the comps, there are other macro factors; it seems like less improvement in the unemployment rate and slightly higher gas prices year-over-year. Just wanted to see what your perspective was on those impacts to the overall comp? And I may have missed in prepared comments but just talk a little bit about traffics into your stores and how that’s changed over the last couple of quarters?

Okay. Regarding those macro trends that you talked about, regarding unemployment and increased gas prices, the only time we’ve really seen unemployment be a key driver of our performance is when it has been significant increases like during the great recession. And for whatever reason that seems to be a driver of our business rather detractor of our business. On gas prices, clearly, we want them to be as low as possible. But the only time we’ve really seen -- or call them out as material contributors to our success or headwinds for us, have been when they really got up around $4 a gallon. So, I don’t think we believe move from 2 to 250 is going to make any significant difference on our performance. Regarding traffic, clearly our traffic was down this quarter, particularly on the retail side of the business, it was one of the softer quarters that we have had. It has not performed any different than it has over the long term during this April period of time, in order it perform any differently in the fall. We do have an industry -- as an industry, our long term challenge was traffic going down but at the same time cost of products going up as the quality improves on the products that we sell, we have been doing that last 20 years.

Thank you.

All right. Thank you. Before we conclude the call, I just like to wish everyone a nice Memorial Day weekend and thank you everyone that have served in our process. [Ph] But we are excited about our growth prospects for the year. We will not take anything from 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 successful. Thank you for participating in today's call.

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