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, today’s call is being recorded. And if you have any objections, please disconnect at this time. The conference call will discuss AutoZone’s third quarter earnings release. Bill Rhodes, the Company’s Chairman, President and CEO will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 10:00 a.m. Central Time or 11:00 a.m. Eastern Time. Before Mr. Rhodes begins, the company has requested that you listen to the following statements regarding the forward-looking statements.

Certain statements contained in this presentation constitute forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, seek, may, could and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties including, without limitation, product demand, energy prices, weather, competition, credit market conditions, access to available and feasible financing, the impact of recessionary conditions, consumer debt levels, changes in laws or regulations, war and the prospect of war, including terrorist activity, inflation, the ability to hire and retain qualified employees, construction delays, the compromising of confidentiality, availability or integrity of information, including cyber attacks and raw material cost of suppliers. 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 25, 2018 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. I would now like to turn the call over to Mr. Bill Rhodes.

Good morning and thank you for joining us today for AutoZone’s 2019 third quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, 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 is 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 organization for their commitment to our company’s pledge especially putting our customers first in everything that they do. Their passion for living our culture and surprising and delighting customers is our greatest strength. Overall, we were pleased with our performance for the third quarter. Our commercial sales again accelerated from the previous quarter and we posted the highest sales increase in DIFM since the fourth quarter of 2012. Our DIY business also remained solid. The quarter began very soft as tax refunds were delayed and as late February saw milder weather with significant precipitation. Once tax refunds began in earnest in early March, our sales rebounded nicely and remained pretty consistent for the remainder of the quarter. Yes, heavy precipitation in certain weeks slowed trends in both DIY and commercial, but that’s normal in the spring. Ultimately, we were pleased with our sales performance in both retail and commercial for Q3 ending the quarter with same-store sales growth of 3.9%. Now, let’s focus on the two different customer bases we serve, DIY and DIFM. We previously mentioned that our DIY market share gains were strong in the first half of last fiscal year and that growth materially subsided in…

Thanks, Bill and good morning everyone. To start this morning, let me take a few moments to talk more specifically about our domestic retail, commercial and international results. For the quarter, total auto part sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores increased 4.7% for the trailing 52 weeks ended total sales for AutoZone store were $1,814,000. This is up from an average of $1,785,000 at Q3 ending last year. Total commercial sales increased 14.9% in the quarter. Commercial represented 22% of our total sales and grew approximately $80 million over last year’s Q3. We are excited to highlight our domestic commercial sales surpassed $10,000 in average weekly sales per program for the first time in history. On a trailing four quarters, we are now selling over $2.4 billion commercially. One metric worth highlighting is the growth rate for commercial sales since 2010. We sold $880 million of goods to professional installers back then and today, we are over $2.4 billion. Our compound annual growth rate has been 30% over this time period, a great accomplishment for our AutoZoners. We now have our commercial program in 4,831 stores or 85% of our domestic stores. As Bill mentioned earlier, we remain committed to gaining market share with our commercial customers. We are encouraged by the initiatives we have in place and feel we can further grow sales and market share. Our Mexico stores continued to perform well. We opened eight new stores during the third quarter, ending the quarter with 576 stores. We expect to open approximately 40 new stores for the full fiscal 2019. Regarding Brazil, we now operate 25 stores. We have aggressive plans to open approximately 13 additional stores by the end of fiscal 2019. Our performance continues to improve and we…

Thank you, Bill. While we had a strong sales quarter, we know we have much work to do to finish this year strong. The summer months generate a large percentage of our annual sales and we’ll be opening up a substantial portion of our new stores, commercial programs and mega hubs during the fourth quarter. We also have a lot of deliverables from our IT initiatives this upcoming quarter. We also have we remain focused on simplifying our store AutoZoners workloads to reduce clutter and unnecessary task that get in the way of making the customer experience better for both the do-it-yourself customer and the professional customer. We believe our industry’s fundamentals will remain strong as miles driven are expected to increase over the remainder of the year. This upcoming quarter, we are laser focused on executing our game plan. We are excited about our balanced model for growth around domestic retail and commercial, international, online and Pick-Up In-Store. We believe our hubs and mega hubs, Mexico, ALLDATA and digital can all grow their top lines for the remainder of 2019. To execute at a high level, we must adhere to living the pledge. We cannot and will not take our eye off of execution. Success will be achieved with an attention to detail and thoughtful execution. Services always been our most important cultural cornerstone and it will be long into the future. Our charge remains to optimize our performance regardless of market conditions and to continue to ensure we are investing in the key initiatives that will drive our long-term performance. In the end, delivering strong EPS growth and ROIC, each and every quarter is how we measure ourselves. This formula has been extremely successful over the last 40 years and we continue to be excited about our future. Now, we would like to open up the call for questions.

Thank you. And we have our first question is from Christopher Horvers of JPMorgan. Chris, your line is open.

Thanks, good morning, everybody.

Good morning.

Can you talk about the mega hub expansion you’re roughly doubling the target. So couple of questions there, is the list that you’re seeing better than what you saw prior and any quantification. And then just structurally, is this a market expansion i.e. you were targeting 40 markets, now you are going to 80 or you are actually building and density that cuts drive time to replenish then – satellite stores and directly fulfill more customer orders.

Yes, terrific question, Chris. It’s both, frankly. We will be adding mega hubs in smaller markets than we envisioned originally and will also be adding to density in some of the largest markets. As we said all along, since we’ve introduced these mega hubs, they continually have outperformed our expectations. So frankly, the analysis that we did four years or five years ago when we started them, said, we can only do 25 to 40 as they – as their performance has improved, they’ve allowed us to go to these other markets.

Understood. And then in terms of the commercial business, Bill, you mentioned that you are quite pleased with the momentum heading into the fourth quarter. Sorry to parse this out. But is that a comment on April on the strong finish to 3Q or is that a comment on May because arguably April was – I think the – one of the easiest comparison to the year and May, flips up to be the one of the hardest.

Yes, and I don’t really want to get into too much on week to week comparisons. As you know in this business, weather matters, especially on a weekly or geographic area – certain geographies. I don’t want to spend too much time on it. We feel confident that we’re continuing to build momentum in the commercial business. Now, when you talk about comps, we are up against tougher commercial growth in the fourth quarter of last year. That’s not lost on us, but this is not about a quarter or two. This is about a long-term growth model.

Understood and one quick last one. On the gross margin, was there a benefit from lower product acquisition costs that offset some of the mix headwinds, the past two quarters, I think it was about 40 basis points of lower product acquisition costs.

A little bit, but I mean, we still had some inflation as Bill mentioned overall. I think, probably the one thing that impacted gross margin as we highlighted was just the increased penetration of the commercial business, overall. But we continue to believe there are opportunities within gross margin to lower acquisition costs as we continue to increase our direct importing activity.

Understood. Best of luck, guys.

Thanks, Chris.

Thank you, Chris.

Thank you. Our next question is from Simeon Gutman of Morgan Stanley. Simeon, your line is open.

Thank you. Good morning, one follow-up to the prior question, on the expansion of the 70 to 90 mega hubs. Because you have momentum in the business, in the commercial business and you’re densing up these markets. Can you talk about the cost and I guess the presumption is – it feels like the incremental cost here, could be a little bit less, because these are more fold out as you dense up market, is that a fair assumption? And can you just talk about the cost in general?

Yes, first of all, I think, as we’ve rolled out the ones that we have to-date, we haven’t called out the mega hub cost is a significant contributor to our cost structure. Clearly, it’s more expensive. The first ones that we did, we were able to go into – in many cases existing excess space that we already had. As we go to the next ones, we’ll be having to take down a little bit more real estate or additional lease space next to a store that we already have. So there will be costs, but I don’t think, it’ll be meaningful costs that we’re calling out as a key contributor to our performance.

Okay. And then my follow-up is on gross margin, Bill, you just mentioned that you should still benefit somewhat from lower acquisition costs. But does the mix of commercial over – offset that, such that the gross margin should now decline. And then in general, is there a relationship between some rate of the commercial sales growth to GM that sort of proportional as we think about as the commercial business continues to grow rapidly.

Yes, that’s a good question. I think that it will be a function of how fast commercial continues to grow. So that will continue to put a little bit of pressure on us. Look the way we think about it is our margin overall is relatively healthy across our businesses. We continue to have opportunities to improve it, but we recognize that the – one of our lower margin business is growing significantly faster and we’re thrilled with that. That’s exactly our objective and that’s exactly what we’re trying to accomplish.

Okay, thanks. And nice results.

Thank you.

Thank you. Our next question is from Seth Sigman of Credit Suisse. Seth, your line is open.

Hi guys, good morning and congrats on the quarter. Two follow-up questions, one on the hub strategy, what just remind us, what held back the rollout previously and what’s changed. I mean, you talked about strong results, but we would just love some more color on whether there were some real estate constraints or just how you were thinking about that and what percent of the store base today is being affected by the hub strategy and what will that look like when you hit the 90 mega hubs?

Yes, as we expand from 25 to 40 to 70 to 90 mega hubs, it’s not going to add a substantial amount, of additional stores to have access to that inventory. Over 90% of our stores today have access to the mega hub inventory. What it will do is it will shorten the lead time, many of those stores today will get it on 3 time a day basis, some of them will get it once a day basis and others will get it overnight. As we expand this, we will go to more stores that have access 3 times a day and fewer stores that have access overnight. But there will always be stores that have access overnight, because they are simply too far from the mega hub. I think what held us back. Frankly, we would love to be farther along the mega hubs today that the big challenge with this is, these are big boxes and they take time to get them to find the right real estate and to develop that real estate. We will have the same experience as we go from our 28 today up to 70 to 90 mega hubs. It will take us some time. I would say what changed was the economics changed. We are getting more productivity out of the existing box of the mega hub itself and we’re getting more productivity out of the stores that are adjacent and feeding off of that box, particularly the stores that have access 3 times a day or in the local market. So just the economies – the economics changed and made it more beneficial for us to do it.

That’s great. Thank you. My follow-up question is on the SG&A front. You talked about this year being an investment year, seems to have played out largely as you expected and talked about earlier in the year and it’s nice to see how that’s translating into topline gains. Do you think that this year is the peak for investments and that we should be thinking about SG&A growth next year being less than this past year?

Yes, I think that this year is the peak. I think, we’ll staff some overlay next year. Keep in mind that many of the investments that we’ve put in place last year really kicked in at the very end of Q1 of this year. So, we will wrap that around a little bit in Q1, but yes, I think that the investments will peak out a little bit this year and we’ll continue to moderate as we move forward.

I do think if I can add on the I do think, and I’ve commented earlier, we are going to have increased technology spending for the foreseeable future. And today, I think we are also continuing to see that the wage market is probably different than it was five to seven years ago because you have the regulated markets that are continuing to march toward $15 an hour and then you have other markets that there are market pressures from other retailers that are moving those wages up. So, I think, we will continue to have not at the level that we experienced this year, but I believe, we will continue to have wage pressures and information technology accelerated spending.

Okay, understood. Thank you.

Thank you. Your next question is from Michael Lasser of UBS. Michael, your line is open.

Good morning. Thanks a lot for taking my question. As you make these investments in your stores to better position the Company for commercial growth, are you equipping the stores with any tools to allow them to engage better with the commercial customers such as allowing them to do things like introductory pricing? So that the commercial customers can try AutoZone and help you supplant some of the existing relationships?

Yes, I would say that probably one of the primary things that we’re focused on is making sure that we are easy to do business with and so, whether that be returning products, paying bills, looking at account information, making sure they have all the product information that they need, their history, etcetera. That’s probably the first place we’re starting. We always have opportunities to be able to introduce new customers to pricing depending on their spending level and so a new customer may be able to get better pricing, if they have a commitment on certain spending level not unlike existing customers as well. So, there’s opportunities for those, but the bigger play is really our ability to connect with the customer, have a more personal relationship with them, both electronically as well as having our field people out talking to the commercial customers every day and being able to be an easier place to do business with.

And Bill Giles, if you look 5, 10 years from now and your commercial business represents 30% of your mix rather than 20%, what would the operating margin of the business look like?

Well, depending on what happens and a lot of other factors then you would have to assume it will be slightly lower than it is today just from a math perspective. The commercial business does operate at a lower margin, but if we can grow that at that rate, that would be outstanding because we would really be driving operating profit dollars.

Okay, thank you so much.

Thank you. Your next question is from Brian Nagel of Oppenheimer. Brian, your line is open.

Hi, good morning.

Good morning.

Congrats on nice quarter.

Thank you.

I just had couple of questions. I know we’ve already discussed quite a bit the commercial sales growth. But maybe to drill down a little bit further, here in this quarter, we had year-on-year growth nearly mid-teens and that’s been it represent an acceleration from high-single digits not that long ago. Is there a way to of all the initiatives you have in place that you can look at that and say, what factors in particular have helped to drive that further acceleration in sales growth from an already decent level and how should we think about the sustainability of that growth rate in the coming quarters?

Terrific question, Brian. I would tell you that it’s the culmination of about four years worth of very focused work. If you recall, we reupped our strategy in 2008 and had a nice run with that and then about four years ago, we knew we had to come up with the next leg of what our strategy looks like. We did a tremendous amount of work, most focused on improving our product assortments, leaning into the commercial business. We did things like multiple frequency of delivery we expanded and improved the assortment that we have in our satellite stores and in our hub stores. We added mega hubs which we didn’t have four, five years ago and on and on. We’ve really improved the product assortments, focused very much on commercial. Then over the last year and we’re beginning to annualize that right now, we really ramped up the engagement of our store operating teams. I will put our operating teams up against anybody out there, they can execute like nobody’s business and we really take that execution focus and dialed it into commercial, where before for the most part, the Commercial Sales Manager and the TSM were the direct contact with the customers, now we’ve enhanced that, by adding the Store Manager and the District Managers. And our Store Managers are phenomenal customer service people and when they’re going out making these sales calls, they’re finding out what are we doing right and where do we have opportunities for improvement, and they’re coming back and leading the store team in that direction. So that’s to us what is enhanced our performance.

That’s very helpful. The second question I have, the follow-up question, different topic, with regard to tariffs. You mentioned in your prepared comments that you basically reiterated that with the pricing power you have, and given your history and given the nature of the business that makes a lot of sense. But the question I have is, I guess two-fold, one, just remind us how much exposure from a sourcing perspective AutoZone does have to China or to tariff-affected categories. And then second, having been with the business for a while now, have there been instances where for one reason or another, AutoZone was not able to effectively pass along cost to consumers?

I’ll start with the latter question, not that I can think of off the top of my head and we have dealt with over many, many years significant increases because so many of the products we sell are significant commodity-based products. So, we’ve dealt with oil shocks, we’ve dealt with lead price increases, we’ve dealt with steel price increases. Many times, those have come pretty quick and we have been able to pass those cost along to our consumers. But let me be the first to say, we are not pleased about the tariffs. We are concerned about what that will do not so much to AutoZone or our business, but more to what it would mean to the U.S. economy. But we have a strong history of being able to say, OK, we can pass those on to our customers. It’s one of the beauties of being in a relatively inelastic demand business.

And as far as the exposure to China source China-sourced products?

Yes, that’s a very difficult question to say. We have a significant amount, of products that come out of China. We don’t direct import a ton, less than 10%, but we have a lot of importers that bring it in from China and then we also have a lot of our products where the components are being manufactured in China and the products are being assembled here. So, we have significant exposure to products that are sourced from China whether we do it or somebody else does it.

Thank you very much. Congrats again.

Alright, thank you. Have a great day.

Thank you. Next question is from Bret Jordan of Jefferies. Bret, your line is open.

Hi, good morning, guys.

Good morning, Bret.

Just a question on the regional performance, you talked about the Northeast, Midwest, Mid-Atlantic being the strongest, could you give us sort of a feeling for what the spread was to the weaker regions?

It wasn’t significant as it has been in quarters, where we’ve had a lot of divergence, but it was probably in the 100 to 150 basis point range.

Okay. What might have been the softest region in the country?

I would say, probably, to be honest with you, it was really pretty even across the country. I thought it is 100 to 150 basis points between those ones that we highlighted and the ones that we didn’t. But otherwise, I would say, for the most part, take the big geographic areas of the country, it was pretty healthy across most of the country. So it was pretty encouraging.

The one places where it wasn’t healthy were the markets that were impacted by hurricanes the previous year and we’re lapping those significant growth. So that’s Puerto Rico, Houston, South Florida all those areas, that was where we were the weakest.

Okay, great. And then a follow-up on the commercial business, I guess $2.4 billion, how would you categorize that mix sort of national versus one off commercial customers?

We really haven’t got into specifics on the mix of what it is but the growth of both of them was very encouraging. Our up and down the street business is growing very well and our national account business is growing well also.

Okay, great. Thank you.

Thank you.

Thank you. Our next question is from Gregory Melich of Evercore ISI. Greg, your line is open.

Hi, thanks guys, great quarter. I guess, so I’d love to know is little bit more detail on traffic versus ticket in total and if you give us a breakdown on do-it-for-me versus DIY that’d be great.

Yes, we really focus the most on traffic and ticket than the DIY business. Obviously, we’re growing both in the commercial side of the business. Our DIY traffic and ticket trends were not significantly different than they have been. We have a long-standing challenge with transaction count and that’s being made up with a long-standing growth in average ticket. Those trends were not meaningfully different this quarter than they have been.

And maybe if I missed it before, I just want to last year, you’d turned off some of the promotions and online and then you brought them back. Remind me when you cycle, when you turn that off and sort of any incremental color on the online pickup with especially with the FedEx next-day delivery.

Yes. We turned them off, I think around February 1st, and we turned it back on in the latter part of August. And there still stay on today. The FedEx next-day delivery program has really been a great addition to us. It’s not the biggest program, I said in our prepared remarks, that our total digital business is less than 5%, substantially less, but it’s been a nice addition and it’s been a great way for us to surprise and delight customers. So, we’ve been very pleased with that.

That’s great. Good luck, guys.

Alright, thank you.

Thank you. Your next question is from Daniel Imbro of Stephens Inc. Dan, your line is open.

Thanks for taking my question. Wanted to start on the market share comment both in the press release and in your remarks, obviously, your growth is accelerating and outpacing the industry. Bill, it sounded like in your prepared remarks, it was more on the DIY side, but wondering if you could provide some more color on where you think you’re winning that share from both on the DIY and the commercial side. Is it still the smaller independents and is that a trend you see continuing over the next 12 months?

Terrific question. Yes. First on the commercial side, it’s pretty clear that we’re taking substantial market share. The market has grown 4%, 4.5% and we are growing close to 15% and that’s a pretty significant change. And a lot of focus on the commercial side comes, what’s happening with us and our close end competitors. I would change the dialog, if you added the big three together, we only have about 10% market share. There is 90% of other market share out there and to me, that’s where our focus needs to be is how do we enhance our position so that we can grab more and more of that market share over time. And I think the mega hubs play perfectly into that as we are substantially changing our product assortment in the local market, that’s taking away an advantage that was typically held by the warehouse distributors. On the retail side, we are continuing to see that our share gains are accelerating, they are not massive, but they are accelerating. Clearly, the entire industry has taken share away from the mom and pops over a long period of time. If you look at the number of outlets that sell parts in the United States, it’s been around 35,000 outlets since I got in this business almost 25 years ago, that doesn’t change – what doesn’t change even though us and our competitors are opening more and more programs, there is a natural consolidation that happens on the independent side. Will it continue for the future? We certainly hope so.

That’s helpful. And then as a quick follow-up to an earlier answer, you guys sound confident in the ability to pass along procurement cost pressures, but if wage pressures continue to accelerate in the coming years, like it sounds like you expect them to and everyone in the industry is facing that headwind. How is the industry’s ability changing to maybe pass along those cost pressures to the consumer and offset some of that margin pressure with...

Yes, I think it all goes into the same bucket. I mean, it’s an input cost to overall costs and it will probably contribute to general inflation if we see a lot of wage pressure, it won’t be just about AutoZone, but probably be general inflation across the U.S. industries. So again, history would imply that we have some successful both individually as an industry and passing along increased cost to the consumers. So, that’s how we will continue to focus on, but yes, there will continue to be cost pressures whether it would be wage rates, interest rates, utility cost or whatever.

Great. Thanks so much guys. Best of luck.

Thank you.

Thank you. Our next question is from Mike Baker of Deutsche Bank. Mike, your line is open.

Hi, thanks. I wanted to ask about the gross margin. So you said it was below plan. So is it that – was that on the mix and does that mix – the commercial business or are there other products within the DIY or commercial that are causing that negative mix and I guess to add to that, we get that commercial would hurt the margins, but your commercial business has been up double-digits each of the last two quarters, yet your gross margins were up, I think 90 and 115 basis points or something like that. So what was different this quarter? Thanks.

Yes. Keep in mind, when it was 90 and 115 basis points, you had probably about a 70 basis point plus impact from AutoAnything and IMC, but I hear the question. So I would say that yes, some of it was product mix as well and some of it as customer mix as well within commercial. But I would say overall that our margin was probably a little below of what we expected, but not significantly. So we would expect it to be a little bit of pressure as the commercial business continues to grow and we expect to find opportunities to try to offset that with improvements through our merchandising organization.

Okay, that makes sense. And if I could ask one more follow-up and maybe this isn’t something that you are willing to answer, but if for the past three quarters, your 2-year stack comps have been in a really tight range of about 4.5% to 5% which is a lot better than it had been in 2017 and ‘18. So, do we think about that as sort of the new normal, is that how we should think about your business going forward, in other words, comping in the mid to high 2% range depending on the comparison.

Well, I would say first of all that in the 2017 and 2018 time period, there was a lot of focus on the fact that our sales trajectory had changed radically and I have spent a lot of time talking about how tight the band of our sales performance has been since 2013. It’s really within a couple of 100 basis points. We are going to have really good quarters and we are going to have more challenging quarters, but they are still going to be within a pretty tight band. The one difference that we have today and we will see if it’s sustainable or not is we are growing our commercial business at a much accelerated rate. You talk about 2017 and ‘18 we went down into single-digit growth there. Now that we have had it in double-digits and this time close to 15%, that’s making a meaningful difference. We will have to see if we can sustain that level or even continue to grow it from here. That will be the question.

Okay, thanks for the color. Appreciate it.

Alright, thank you. Have a great day.

Thank you. And I would like to hand the call over back to Mr. Bill Rhodes.

Thank you. Before we conclude the call, I would like to take a moment and call out that we will celebrate AutoZone’s 40th anniversary on July 4. The old adage rings true, that we have come a long way since back then. But in the spirit of our Founders’ vision, we remain focused on providing exceptional service and going the extra mile. Our business model continues to be solid and we are excited about the rest of the year. We do not take anything for granted as we understand our customers have alternatives. We will continue to execute on our game plan, but I want to stress that this is a marathon, and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be successful. We thank you for your interest in our company and for participating on today’s call. And in recognition of the upcoming Memorial Day holiday, we want to recognize and say thank you to those who have served our country past and present. We are grateful for the freedoms your service has ensured. Have a great day.

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